How To Lower Your Monthly Mortgage Payment

If you own a home, your mortgage payment is likely your largest monthly expense. 

Even if the cost is spread out over 30 years, it’s still a lot of money to pay out each month, especially with the increasing cost of living. Owning a home is great but you still need to eat! 

Thankfully, there are ways to reduce your monthly mortgage payment — just keep in mind that the more you can pay each month, the more you'll save in the long run.

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How Mortgage Payments Work

A mortgage payment is typically made up of four pieces: 

• Principal
• Interest
• Taxes
• Insurance  

The first two (principal and interest) are repayments of the loan itself — the remaining balance and the interest it costs to borrow from the bank.  

The second two parts (taxes and insurance) are expenses incurred from ownership of the property. Taxes are assessed by the city/county in which the property resides, and insurance is to protect the homeowner (and lender) in the case of a fire, natural disaster, etc.  

The portion allocated toward taxes and insurance is usually held in a third-party trust account on your behalf to pay those bills once a year, called an escrow account.

A potential fifth cost: private mortgage insurance

If you didn’t have enough cash to put 20% down when you bought the home, there will be a fifth element added to your monthly payment: private mortgage insurance (PMI). 

PMI protects the lender since the threshold of having enough equity has not been met — meaning the buyer is considered high-risk.  

Depending on the loan type, PMI can sometimes eventually be dropped or refinanced once you’ve achieved at least 20% equity in the home.

READ MORE: What You Need to Know About Mortgages

6 Ways to Lower Your Mortgage Payment

It’s possible to modify any of the elements listed above to reduce your monthly mortgage payment but be warned it may add to your overall loan balance. 

That’s because by paying less each month, you could be stretching your loan out for longer. Even paying as little as $10 more per month could add up to big savings.

Before you reduce your monthly payments, weigh the pros and cons carefully. 

1. Refinance

Refinancing is common, especially if mortgage interest rates have dropped significantly from the rate you got when you first bought the home.  

In this case, you would refinance the interest rate to a lower amount, to save money on the interest portion of the monthly payment.  

It’s a smart idea to keep an eye on the economy and mortgage interest rates. Or reach out to a lender every once in a while to check interest rates. These rates move up and down along with the broader economy and are influenced by many factors.

However, refinances do come at a price. You are essentially redoing your home loan, which comes with closing costs for processing the loan change paperwork. In some cases, you could also be required to have another appraisal.  

While these fees usually aren’t as much as a purchase closing, they can still add up. You can calculate a break-even point by estimating how much time you plan to live in the home and multiplying that by the different loan costs to determine which scenario would be best for you.

READ MORE: Why Did My Mortgage Go Up?

2. Recast 

A recast is similar to a refinance, but would not constitute a full loan closing.  

Recasting can be done if you have a lump sum to apply toward the mortgage. The lender can recast the loan amortization with the new large payment taken into account, thus reducing your monthly payment.  

This isn’t as common as refinancing but is a good option if you receive a windfall or inheritance and are looking for ways to use the funds wisely.

3. Shop around for other lenders

One of the best ways to keep your mortgage payment down is by shopping around for lenders before even purchasing the home.  

Sometimes the closing deadline doesn’t allow for this, but if you can, compare what multiple lenders are offering.  

Often it’s not just about the interest rate, but also the annual percentage rate (APR). The APR takes the interest rate plus other fees charged for the loan and puts this into an annual figure. 

Lenders are required to disclose the APR but it is an easy figure to overlook in all the paperwork, so make sure you are proactive in determining what the true monthly cost is.

READ MORE: How Much House Can I Afford?

4. Buy down your rate 

When you buy a home, you can buy down the interest rate by purchasing “discount points.”  

Each point is 1% of the loan amount and paid upfront at closing. Essentially by doing this, you are prepaying interest.  

Just like with refinancing, it is important to calculate your break-even point, weighing the upfront cost over the long-term savings. If you don’t plan on living in this home for more than a few years, it may not make sense to pay a bunch of prepaid interest.

If the real estate market is softening, a great way to buy down the rate is to use seller concessions. Instead of negotiating a lower purchase price on the home, you could request the seller contribute to your closing costs.  

5. Avoid PMI

You can avoid private mortgage insurance by putting down at least 20% of the purchase price.  

With home prices skyrocketing, this is becoming tougher to do, but is certainly worthwhile to avoid that monthly fee.  

This may not be ideal or realistic for some, but taking more time to save up for a home and putting more down could amount to a large savings every month.  

Compare the costs to what you’re currently paying for housing — in some cases, buying even with PMI included (temporarily until you build up enough equity) is a better option financially than continuing to pay high rent rates.

6. Improve your credit score 

The interest rate you’re offered is based on many factors, but one of them is your credit score. Your credit score is a measure of how responsible you are with borrowed money.

Credit scores range from 300 to 850, with a score around 700 considered good. Look up your score and see where you fall. 

If your score is low and your debt-to-income ratio is high, try to pay down some debt. You could be eligible for a better interest rate, which could save you money in the long run.

READ MORE: How to Increase Your Credit Score the Right Way

FAQs

Can you negotiate your monthly mortgage payment?

Yes, you can negotiate with your lender, both for a new mortgage or for refinancing your existing mortgage.

If your credit score has increased, your home’s value has gone up, or national mortgage rates have dropped, you can use these as part of your negotiations. You can also show offers from competing lenders and see if your lender will match them to keep your business.

How much should your mortgage payment be?

The general rule of thumb is your housing costs should be no more than 28% of your monthly gross income. 

Some lenders may approve you for more than that, but that is the widely accepted norm and a good way to determine affordability. 

TL;DR: How To Pay Less for Your Mortgage

With the cost of living these days, it makes sense to want to lower your mortgage payment as much as possible.

But don’t miss the forest for the trees. In some cases, paying more toward your mortgage (either upfront or each month) can shave thousands of dollars or years off your mortgage. 

For more tips on maximizing your budget, check out these episodes of the Erika Taught Me podcast:

• THIS Is How You Negotiate
• How To Budget for Beginners
• How To Become Better With Money

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