Buying or refinancing a home is a big deal, emotionally and financially. For most of us, it comes with a mixed sense of excitement, relief, and fear. Fear? Yes. We wonder if we’ll be able to make the payments if something happens with our job or if big expenses will eat away our savings. But if you know how to get a low mortgage payment, you can allay some of these concerns and enjoy your home.
Unfortunately, a lot of people make mistakes in purchasing a home and struggle to pay the mortgage in the first few months of home ownership. There is a better chance that the bank made a poor choice in offering you a mortgage.
Such problems shouldn’t happen if you and the lender each do your due diligence. Part of that process is understanding what it takes to get a lower mortgage payment on the same home. Payments can be lowered either on the initial purchase or down the road if your situation changes.
How to get a low mortgage payment: Four steps to consider
Of course, there is always the option of buying a cheap house, but under the assumption you want semi-comfortable living, here are some other ways to lower your mortgage payments.
1. Make a larger down payment
One of the best ways to set yourself up for lower mortgage payments and a safe repayment process is by making a larger down payment when you purchase your home. This means you will have less to pay back over the life of your mortgage and more equity in your home from the start of your ownership.
Bear in mind, a down payment should be made with the future in mind as well. It wouldn’t make sense to drain your savings. A lower monthly payment doesn’t help you much if you no longer have your emergency savings in place.
2. Use a longer loan term
Take advantage of a longer loan term when you first purchase your home or if you are later in the home ownership process and looking for a way to lower your monthly payments. With shorter term loans, the bank will require larger monthly payments to reach your payback. Choosing a 30-year loan as opposed to a 15-year mortgage or other shorter-term will give you a smaller monthly payment. This is a useful strategy, especially when interest rates are low.
If you are already years into making your mortgage payments, you can also refinance your mortgage to extend the payment period and lower your payments. This will mean you will be paying back your mortgage for a more extended period than initially planned, and you will have to pay additional closing costs on the refinance. Still, it is an effective way to reduce your monthly payments, especially if you already have a lot of equity in your home.
3. Get rid of Private Mortgage Insurance payments
Private Mortgage Insurance (PMI) is required on Federal Housing Administration (FHA) loans and some conventional loans. Removing PMI from your monthly payments will make them easier to manage, but you’ll need to meet some requirements depending on the type of loan you have.
With a traditional loan, if you put less than a 20% down payment on your home when you first purchase, you will likely need PMI. Once you have 20% equity in your home, you should be able to have PMI removed. On the other hand, with an FHA loan, you will need to refinance to a traditional loan (again, assuming you have 20% equity).
4. Refinance to a lower rate
If interest rates fall during the life of your loan, you could have an opportunity to reduce your monthly payments by refinancing. This method requires a little more analysis to make sure it is worth your time and money. Refinancing for an interest rate less than 1% lower than your current rate may not save you any money once closing costs are factored in.
None of these strategies for how to get a low mortgage payment are without their risks. Reducing monthly payments always comes at a cost somewhere else. You must be sure you understand the trade-offs when reducing your monthly payments, or you could face a more significant challenge than you bargained for.
What kinds of problems have you run into while trying to get a mortgage?