Tips for Lowering Your Mortgage Payment

Your total mortgage payment consists of the principal, interest, property taxes, homeowners insurance and mortgage insurance (if applicable). If you’re considering buying or refinancing your home, there are some ways that you may be able to lower your total mortgage payment.

Improve your credit score. One of the factors in pricing mortgage rates are credit scores. Credit scores are bracketed with higher credit scores receiving improved interest rates. There are currently 5 brackets in the 700 range for credit scoring with conforming financing. Improving your credit score is not the same as improving your credit. In fact, some actions that are financially better for you, like paying off a debt to moving debt to a lower interest rate may actually hurt your credit scores. Before you take action with your credit, please consult with a mortgage professional who can provide advice on improving your credit score.

Increase your down payment. A larger down payment creates a lower loan amount, which would provide a lower payment. It may also help to improve your interest rate depending on the amount of down payment and the loan type. Currently, there are 9 different loan-to-value brackets with conforming pricing.

Reduce your monthly debts. Debt-to-income ratios (DTI) may impact the interest rate. If your debt-to-income ratio is on the higher end, it may cause the interest rate and private mortgage insurance (if required) be higher as pricing is “risk based”. Some debts may not be required to be paid off if they are installment and have less than 10 months remaining.

Do you qualify for special mortgage programs? Fannie Mae and Freddie Mac have special mortgage programs that limit the amount of “loan level price adjustments” on mortgage rates. Fannie Mae HomeReady and Freddie Mac Home Possible are programs that provide improved interest rates and reduced mortgage insurance premiums. To qualify for these programs, the home needs to be located in specific areas or the borrower needs to meet certain income limit requirements.

Buy your interest rate down. Interest rates are often priced with points (discount points). The more you pay in points, the lower your interest rate may be. However, you need to consider if the amount you’re paying in points is worth the reduced payment. I recommend determining how long it will take to break even on the additional cost of paying for points. If you’re planning on refinancing or selling in a few years, it may not be worth paying the additional costs for the lower rate.

Negotiate with the seller to buy your interest down. Sellers can often contribute towards closing costs, including doing permanent interest rate buy downs by contributing funds towards points as mentioned above, or by offering to do a temporary rate buydown. A temporary rate buydown (often referred to as a 3-2-1 or 2-1 buydown) lowers the mortgage payment the first 12 months; then the rate increases by 1 point for the next 12 months until the rate adjusts to the actual note rate. This takes place as the amount the seller is paying is actually subsidizing the principal portion of the payment. Whether or not the seller will pay for points may depend on the type of market we’re in. You may find yourself in a position where you may need to offer above the list price to have in order to have the seller agree to contribute towards closing costs and/or your rate reduction.

Do you have private mortgage insurance? If you currently have private mortgage insurance, it’s possible that your home may have appreciated enough to where you may be able to have this removed from your payment. If the mortgage servicer is not willing to remove the private mortgage insurance (pmi), you may be able to refinance into a new mortgage (depending on what current rates are).

Recast your mortgage. If you have a large sum of money, you can apply it towards the principal balance and request your loan to be re-amortized or “recast”. This may make sense if you have nothing else to use those funds for, such as paying off high interest debt or investing into your retirement. Something to keep in mind before you recast your mortgage is once the funds go into the mortgage, it will cost you money to extract those funds should you need them in future.

Whether you should pay off a debt or do a larger down payment depends on your personal financial scenario. A mortgage professional can help you create a strategy to help you be in the best position for buying a home. Sometimes this may include applying additional funds towards paying down debts instead of going towards the down payment to improve the total monthly cashflow. This is a part of my job that I probably enjoy the most – helping people plan so their mortgage works well for them! Before you take any actions, please do consult with a mortgage professional.

If you’re thinking of buying, refinancing, remodeling or selling a home, I’m happy to help you!

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