How to lower your mortgage payment without refinancing: 5 easy strategies
A recent survey by U.S. News found that 84% of homeowners plan to refinance their mortgages to lower interest rates and reduce monthly payments.
Sounds like a great idea, right? Except that mortgage rates don't show any signs of retreating. That means, unless you want to pay extra in higher interest rates as well as closing fees, refinancing is off the table for now.
Fortunately, there are alternative strategies to reduce your monthly payments.
Reasons to lower your mortgage payment without refinancing
Most people only refinance their mortgage if the new rate is at least 0.5% lower; otherwise, the cost-benefit is not worth the effort. Some cannot refinance because of poor financial health, while others choose not to for reasons like:
- Closing costs: Refinancing closing costs can range from 2%-6% of the loan amount—a significant expense, even barrier, if you are struggling financially.
- Credit score impact: A credit check for mortgage refinancing may cause a slight decrease in your credit score, potentially affecting other loan applications in the near future.
- Prepayment penalties: Certain mortgages include prepayment penalties, requiring homeowners to pay additional fees if they choose to pay off their loan before the designated term.
- Avoid the hassle: Applying for a loan entails compiling numerous documents and possibly having to navigate multiple lenders—a lengthy and intricate process.
- Lack of equity: When refinancing, most lenders want you to have at least 20% equity in your home. Some may refinance with less, but with higher interest rates and stricter terms.
Five ways to lower your mortgage payments without refinancing
You can reduce mortgage payments to get lower interest rates, prevent foreclosure, or meet eligibility criteria for other loans. The specific approach taken depends on your financial situation and goals.
1. Recast your mortgage
Recasting your mortgage is when you make a large lump sum payment toward your current mortgage, which reduces your remaining balance.
Unlike refinancing, it does not change the length or interest rate of the loan. Instead, it recalculates your remaining mortgage balance and spreads it over the remaining loan term.
Imagine you still owe $200,000 on a 30-year fixed-rate mortgage with an interest rate of 7%. Your current payment is $1,330, excluding property taxes and insurance.
If you paid your mortgage down by $50,000, your remaining balance would drop to $150,000. Recasting would bring your new monthly payment down to around $997, saving you $333 monthly.
Recasting is a wise choice if you have recently received a substantial sum, such as an inheritance or bonus from work. But not all lenders provide this option, so be sure to check with yours.
2. Cancel private mortgage insurance (PMI)
PMI for conventional home loans is typically 0.46%-1.50% of the initial yearly loan amount. Once you reach 20% equity, you can request to have PMI removed, lowering your monthly payments.
Note: If you purchased a home with Federal Housing Administration (FDA) loan between January 2001 and June 3, 2013, your MIP should automatically cancel once your loan-to-value ratio reaches 78% or less.
However, the rules differ if you bought a house before or after this period. For loans originating after June 3, 2013, MIP can be canceled after 11 years if the down payment is 10% or more.
In the case of a lower down payment or a loan acquired before January 2001, your mortgage insurance payments will remain throughout the entire loan duration unless you decide to refinance to a conventional loan.
3. Request a mortgage modification
Currently behind on at least one mortgage payment or anticipate being unable to make a payment soon? You may qualify for a loan modification.
To qualify, lenders usually require proof of significant financial hardship before they lower interest rates and extend loan payment terms. Just be aware you will pay more in the long run.
For example, let's say you can't afford to make the payments on your 30-year, 7% interest rate mortgage which are $1,000 per month. Your lender may lower your interest rate to 6% and extend your loan term to 35 years.
Your new monthly payment would be lower at $786, but over 420 months, your total payment would be $329,460—$29,460 more than the initial amount.
4. Lower your property taxes
Property taxes are based on your property's current market value and the applicable tax rate. If you bought your home during a real estate boom but subsequent property values have declined, your taxes may decrease.
Review your tax card and compare it with similar properties for discrepancies. If you disagree with your assessment and can't convince the assessment office, you can still appeal your tax bill.
Some states also offer exemptions to seniors, veterans, disabled individuals, farmers, and those with homestead status. It's worth contacting your tax authority to inquire about exemptions you may qualify for.
5. Apply for mortgage forbearance
Mortgage forbearance allows you to pause or reduce your payments when facing financial challenges such as job loss, illness, or other difficulties.
This protection is designed to prevent the risk of foreclosure and protects your home, allowing you to focus on improving your financial situation.
Your interest rate remains the same and the missed payments must still be repaid, whether via a lump sum, by increasing future payments, or through a restructured repayment plan.
Reduce your mortgage payments without refinancing
There are several ways to lower your mortgage payments without refinancing, such as talking to your lender, using government programs, making extra payments, reducing taxes, or canceling PMI insurance.
If you cannot or do not want to refinance, consult a financial advisor to get personalized advice about lowering your mortgage payments and whether it is the right choice for you.