So….You found your dream house, then you went to the bank and they approved a mortgage– SUCCESS! Or so it seemed. Now it’s a different story. Every time your mortgage payment goes out, you’re forced to serve guests mediocre freezer meals with wine in a box for the rest of the month. If this is you, don’t worry, we’ve been there.
The vast majority of lenders to try to analyze your financial situation to the best of their ability so they only lend as much as they know you can pay back. However, life happens. Things change. Cars break down, children get ill, companies go bust, and a whole host of other unpredictable things come up and dry out your account. If this is where you find yourself, we suggest you start using these smart, completely legitimate strategies to reduce your mortgage payments.
You’ve probably considered this one already. Interest rates are at their lowest and that’s good news for you! Imagine you took out a 30-year fixed-rate mortgage for $250,000 in February 2014 at 4.4% (stay with me). Refinancing right now at 3.5% would reduce your repayment by about $48,141 over the entire term of your loan ( assuming you only incur charges of $3000).
In plain English, this means refinancing can instantly give you $125 more to spend every month. If instead, you simply took 10 years off your mortgage, you wouldn’t see a difference immediately, but you’ll be making payments for a shorter time overall.
- Get rid of your mortgage insurance
Many lenders will ask you to pay mortgage insurance if your down payment is not up to 20%. That means you are paying an extra $225 per month on a $250,000 home if your down payment was only 5%. You can try to make this cost disappear by getting another job to be able to put 20% down, but we actually want you to enjoy your life while you pay back your loans. The easier way is to check whether your property has appreciated by 20% after 2 years or more and have the insurance cancelled. We know, it’s genius.
- A combination of refinancing and removing mortgage insurance
Having lower interest rates and a house that is appreciating in value is a double win for owners. If that’s you, you should be smiling now. 😉
Let’s say you bought your house for $350,000 and put down 5%. Your mortgage would be $332,500. Not too long ago, interest rates were 1-2% higher. On top of that, let’s say you house’s value has gone up to $385,000. You, the borrower would end up with an additional $350 to $375 every month by getting rid of your mortgage insurance and refinancing at lower interest rates. Our friend from Bank Of England Mortgage in Memphis, Tennessee also did the math and showed that your payment reduces by a whopping 18%! We haven’t seen those kinds of savings in years.
- Find a loan that’s interest-only
With an interest-only loan, you get a lot more flexibility. You can decide to pay interest for only the first 8-10 years of a 30 year term. This substantially reduces the monthly payment since you are no longer paying both principal and interest. If your income isn’t steady, this is the ideal loan for you since your monthly payments are lower. You can then pay more in months where you have some extra cash.
E.g. A $250,000 loan with a 3.5% rate for a term of 30 years with both interest and principal would come to $1122 each month. A similar interest-only loan would have a compulsory payment of only $729 per month for 10 years. After that, your payments will increase (by a negotiable amount), but if you feel your financial situation will improve or become more steady in the future, then this could be the best solution for you.
- Three words: Adjustable-Rate Mortgage (ARM)
The most popular choice by far is the 30-year fixed rate loan. However, most people actually hold their mortgage for a much shorter time these days. An ARM in the short term is fixed for between 3 and 10 years before it adjusts. This means you start out with a lower rate and can put some money aside. People who aren’t planning to stay longer than 10 years should not have to incur the cost of locking in one rate since they won’t have the loan for the entire time.
However, you should know that choosing an ARM means that you have a fairly good idea of what your financial future looks like and are willing to bear the cost of being wrong. You might sleep easier knowing your monthly payments are always the same, but you’d be missing out on big savings.
Not sure which strategy is best for you? Use our simple mortgage calculator to see just how much you might be able to save with each of these methods.