Learn How to Lower Your Monthly Mortgage Payment

How To Get A Low Monthly Mortgage Payment

Are you concerned about high interest rates and hefty monthly mortgage payments? Don’t fret. JVM Lending is here to guide you through your journey toward the best way to lower your monthly mortgage payments. We understand how challenging it can be to balance your budget, especially when a considerable chunk of your income goes to your mortgage every month. We’ve compiled the best strategies to help you lower those monthly payments and put more cash back in your pocket – whether you have an existing mortgage or are looking to take on a new mortgage to finance a home purchase.

Understanding Your Housing Payment

Before we dive into the strategies to reduce your monthly mortgage payments, it’s vital to grasp the intricacies of your housing payment. Think of your housing payment as a pie. Each slice represents a component – the principal, interest, property taxes, insurance, and HOA dues (if applicable). Let’s focus on the interest rate slice, shall we?

The interest rate is essentially the price you pay for borrowing money. If the rate is higher, you’re paying more to borrow the same amount. So naturally, when your interest rate is high, your interest payment pie slice will be that much larger relative to your payment slices.

Think about it this way: the lender lends you the principal, which is the actual amount you borrow to buy your home. Then, they charge you interest, which is a percentage of the principal owed, for the favor of lending you the money. This interest is what makes up a significant part of your monthly mortgage payment.

Your property taxes are a percentage of the assessed value of your home, and they can range anywhere from 0.5% to 3%, depending on where you live.  Your homeowner’s insurance is also based on the value of home, but the payments are typically much less than what you will pay for your property taxes. HOA is short for Homeowners Association, and if you home is part of such an association, you will have dues to pay on a regular basis.

Now let’s take a look at the types of interest rates. Mortgages have either fixed or adjustable interest rates, as probably know.  Most people pursue fixed nowadays because they prefer the security of a fixed rate, and there is not much to be gained from taking an adjustable rate.  This is because the “yield curve” has been “inverted” for the last few years, meaning short term rates are often higher than long term rates – so there is often little advantage from taking a shorter term “adjustable rate.” 

The key takeaway here though is that your “housing payment” is different from your “mortgage payment,” as your housing payment includes property taxes, insurance and HOA dues (if any), and your mortgage payment is just your principal and interest.

Refinancing to Lower Your Monthly Mortgage Payments

Refinancing is of course one option for reducing your interest rate, if you already have a mortgage. If you took out your mortgage during the COVID years, however, it is unlikely that rates will be low enough again for your take advantage of this option.

As you know a refinance works like this – you take out a new mortgage, which then pays off your old one. The idea is that this new mortgage carries a lower interest rate than your original loan, which consequently leads to decreased monthly payments. Picture it as trading in your old, pricey loan for a shiny new, cost-effective one. Sounds tempting, right?

But that’s not all refinancing can do. It can also give you the opportunity to shorten your loan term, which means you can finish paying off your mortgage earlier than you initially planned. This could result in saving a substantial amount on interest over the lifetime of the loan – but, be forewarned, it may not lower your monthly payment.

One important detail to remember when it comes to refinancing is that it typically involves closing costs. Therefore, before jumping on the refinancing bandwagon, it’s crucial to figure out if the savings from the lowered interest rate can compensate for these costs.

A good way to do this is by calculating your break-even point. This is the point at which the money you save on your monthly payments equals the closing costs. For instance, if your closing costs are $3,000 and refinancing saves you $100 per month, your break-even point would be 30 months. If you plan on staying in your home for longer than 30 months, refinancing could be a viable option for you.

You might also ask your lender about “no cost refinance” options through which your lender covers your closing costs for you in exchange for a slightly higher interest rate. JVM Lending in fact specializes in no cost refinances with our JVM’s Rate Drop Free-fi™.

Remember, every financial situation is unique – so make sure you’re working with a mortgage lender that will go over all of the options that applicable to you.

Buying Down Your Interest Rate

You can buy down your interest by paying points or discount fees. These are additional fees that you pay at closing either out of your pocket or from loan proceeds. One point is the same as 1% of your loan amount, and typically paying a full point will buy your interest down by about 1/4%. Paying points to buy down your interest rate in this manner is known as a permanent rate buydown.

There is another mechanism that you can also use to buy down your interest rate when you purchase a home. This mechanism is known as a temporary buydown. Temporary buydowns only buy your rate down temporarily, as the name implies, for a period of one, two or three years. The savings can be substantial, but these buydowns also cost a lot more than permanent buydowns that we discussed above. Temporary buydowns are a great way though for homebuyers to get a lower rate and payment for the first year or two after they move in – with the hope of either refinancing or increasing their earnings before the interest rate and payment increases.

Borrowers, however, are not allowed to pay for temporary buydowns, so you would have to get the seller or another allowed third party to pay for the temporary buydown. If you are in the market to buy a home, you should discuss temporary buydowns with JVM Lending, as we are temporary buydown experts.

Making a Larger Down Payment

Here’s a simple truth: a bigger upfront payment can pave the way for smaller monthly payments. Putting down a hefty sum initially can considerably reduce the amount you need to borrow. This, in turn, results in reduced monthly mortgage payments – simply because your loan will be smaller.

Now, you may wonder, what’s the link between a larger down payment and interest rates? The answer is straightforward. A larger down payment could potentially secure you a lower interest rate, adding to your savings, as many lenders offer lower rates for loans associated with larger down payments because there is less risk.

Of course, we understand that coming up with a larger sum upfront might be a challenge, but it is something we always like to illuminate because the benefits from both a payment and interest rate perspective can be significant. We also like to think that you might also ask your parents or grandparents for assistance too, as it can never hurt, and almost all lenders allow for “gift money” assistance.

Considering a Longer Loan Term – Or Expanding the Amortization Period

Let’s explore another strategy: lengthening your loan term. Imagine spreading out your payments over a larger time frame, say 30 years instead of 15. You’ll find your monthly payment amount becomes smaller and more manageable. Picture it like a loaf of bread – the more slices you cut it into, the smaller each slice becomes. And just like that, your monthly mortgage payment becomes one less thing to stress about.

However, let’s put on our practical hats for a moment. While a smaller monthly payment sounds appealing, it’s important to remember the other side of the coin. The longer the term of the loan, the more interest you’ll end up paying overall. Think of it like this: you’re stretching out the time it takes to pay off your loan, which means the interest has more time to accrue. Essentially, you’re trading a smaller monthly payment now for a larger total payment in the end.

Still, for many homeowners, a longer loan term can offer a much-needed lifeline. If you’re currently feeling the pinch and need to decrease your payments immediately, this strategy can provide that relief. 

I should add here too that there even 40-year mortgages, but they typically don’t come with lower payments because they usually come with interest rates that are considerable higher than those available for 30-year mortgages. This is because Fannie Mae and Freddie Mac do not back 40-year mortgages and because they are not as common or as heavily traded on what is called the “secondary market” for mortgages.

Interest Only Loans

Interest only loans used to be a popular option for many borrowers. As the name implies, these loans did not require any principal payments for a specific period of time and that made the mortgage payments themselves much smaller. After the great financial crisis of 2008, however, regulators restricted the availability of interest only loans.

These loans are still available today but, like the 40-year mortgages discussed above, today’s interest loans usually come with interest rates that are much higher than those associated with fully amortized loans. The rates are so much higher in fact that the interest only payments often end up higher than a fully amortized payment with a lower rate.

Applying for Mortgage Assistance Programs

If you’re finding it challenging to manage your mortgage payments, you may want to consider mortgage assistance programs. These programs can be a lifesaver for homeowners, offering potential solutions to lower your monthly payments. Created by different entities such as the federal, state, or local governments, these programs aim to assist homeowners facing financial struggles.

Each program has its own set of eligibility requirements, which can include your income, type of mortgage, and whether it’s your primary residence. Some programs may also take into consideration whether you’re facing financial hardship due to unexpected life events like job loss, divorce, or medical issues.

These assistance programs come in various forms. Some offer temporary financial aid for homeowners who are dealing with a short-term financial setback. Others provide long-term solutions like loan modifications that can permanently change the terms of your mortgage to make it more affordable.

It’s worth spending some time researching these programs to see if you qualify. You may be surprised at the options available to you, and the relief they can provide could be just what you need to get your financial situation back on track.

While navigating these programs can sometimes be complex, the potential benefits can be significant. Don’t hesitate to seek guidance from a trusted financial advisor or mortgage expert to help you understand your options and guide you through the process.

Remember, everyone faces financial challenges at some point. The key is to stay proactive, informed, and explore all avenues available to you. You’re not alone, and help is available.

If you have any questions about any of the items discussed in this blog, please reach out to JVM Lending’s team of mortgage experts by email at [email protected] or by phone at (800) 855-4491.