How To Lower Mortgage Payment: Everything You Need To Know
Having a home you can call your own is a dream many people have. However, with housing costs steadily going up every year, that dream is becoming harder and harder to realize. Most Americans need to take out a mortgage if they ever want to achieve this dream.
Dealing with a mortgage isn’t so bad by itself. But being stuck with a bad EMI means you will have very little wiggle room for any other financial goals you might have. Depending on your current circumstances, you might even find yourself struggling to make monthly payments that you initially didn’t even think twice about.
In this quick guide, we’re going to look at some of the things you can do to make your monthly mortgage payments more agreeable and sustainable without compromising your financial security.
What Is Equated Monthly Installment?
Equated monthly installment (EMI) simply refers to the amount of money paid by a borrower to a lender each month on a specified date. This monthly payment is fixed, which makes budgeting and tracking payments easier for the borrower. Your monthly payment will cover both the principal amount and any interest earned, so you won’t need to worry about making any calculations to find out how much you owe.
Now, this convenience does come with some tradeoffs. The main drawback of paying off a mortgage this way is that you’re more or less locked into the initially agreed-upon timeframe. Unlike variable payment plans, you’re typically required to only make one payment per month. This means you cannot shorten your loan’s tenure by paying more than the usual amount each month.
How To Lower Your Mortgage Payment
Taking on a mortgage is a huge financial responsibility. The small monthly payments might not seem like much at first, but you’re actually committing to paying for a significant sum every year for the next 15-30 years. Failing to make a monthly mortgage payment on time might also lead to some very serious financial consequences.
If you’re struggling to make your monthly mortgage payments, then it might be time to think about changing your strategy before it’s too late. Here are some of the things you can do to lower your monthly payments and give yourself some financial breathing room.
Renegotiate The Loan Term
Before doing anything else, you should first open a discussion with your existing lender about renegotiating your home loan’s interest rate.
Most mortgages are made with a fixed interest rate that does not change throughout the loan’s entire 10, 20, or 30-year tenure. However, due to the ever-changing economic landscape, the interest rates offered by banks to new borrowers often change as well.
If you’re an existing borrower who is a few years into your loan’s tenure (and you have a good relationship with your lender), then you might have enough pull to ask for a renegotiation of your home loan term. There’s no harm in asking for a lower interest rate either, especially if there is currently a trend of low-interest rates in the housing market. A good repayment track record will also strongly help your case.
Regularly Make Loan Prepayments
Not all lending institutions have this option, but if yours does, then it’s one worth looking into.
Prepayment refers to a loan payment made outside of your regular monthly mortgage payment. This usually refers to a large sum of money that can significantly affect the total amount of your remaining debt. It’s a good idea to ask about your bank’s policy regarding prepayments beforehand since these policies tend to vary among different lenders.
If your bank allows prepayments, then you should definitely consider making them a regular practice. Any excess disposable income you make (such as from bonuses or investments) can go towards paying off your total interest, which in turn will lower your future monthly payment requirements. And since you can start contributing to your principal payment sooner, these prepayments will add up to significantly lower your future financial burden.
Look For A New Lender
If your current bank or lending institution is not amenable to any of the previous options, then you can try exploring the possibility of changing your lender mid-loan. While it’s true that this process takes time, it isn’t necessarily difficult.
First, you will need to find a lender that can offer you either a lower interest rate or a longer loan tenure. These two options will help lower your monthly payment to something more agreeable. Do your research and compare the different home loan offers available to you. Use an EMI calculator to find out how much you will actually be able to save.
Once you’ve found a new lender willing to take on your loan, you can begin discussing the home loan transfer with your current lender. Keep in mind that this will entail going through all the processes of applying for a new mortgage. Your current lender will only transfer your outstanding balance and close your account with them once your new bank finishes and approves your screening.
Extend Your Home Loan Tenure
If none of these options work for you, then you might have to extend your home loan tenure. While this does mean that you will have to pay more interest, a longer tenure will lower your monthly mortgage payment.
Do take note that extending your loan’s tenure might be considered refinancing the mortgage. This means that, aside from paying for any penalties, it may also adversely affect your credit score. This should only be your last resort since you are both increasing the total amount of your interest payments and limiting your future financial opportunities.
How To Lower Payments On A Mortgage For New Borrowers
New borrowers have a little more flexibility in trying to lower their mortgage payments because they still have a clean slate. Starting out strong and having a plan from the beginning will ensure that your monthly mortgage payments will never spiral out of control. Here are some things you can do as a new borrower to make sure that your EMIs stay affordable.
Compare All Your Available Mortgage Offers
Before committing to any mortgage, it’s a good idea to first do your research and check the different offers available to you. Different lenders will have different interest rates, processing fees, mortgage insurance fees, etc., and you should inquire with as many lenders as possible. Some lenders might also offer you different rates depending on your credit score or employer profile, or bundle in other charges like property taxes.
Consider foregoing the traditional private lender for a government-backed mortgage. For example, the FHA may require mortgage insurance on all of their loans, but rates are lower and requirements are more flexible.
Put Down More Money Initially
Most lenders require that you make a down payment before approving your mortgage. There will be a minimum amount that you have to pay to get approved (usually no less than 20% of the purchase price), but paying more than the minimum will actually benefit you in the long run.
A big down will lower the principal loan amount, which means that both your future interest payments and EMIs will reduce drastically. You also don’t have to shell out for mortgage insurance, which is often required if you don’t have the minimum down.
Choose A Longer Mortgage Tenure
Most lenders will allow you to negotiate the length of your loan. Depending on how much you’re comfortable paying every month, you can either opt for a shorter or longer mortgage tenure. A 30-year mortgage tenure will spread out the cost of the mortgage over a longer period of time compared to a 10-year loan, resulting in a smaller mortgage payment.
However, do keep in mind that this means you will also have to pay more in interest in the long run. Finding the right balance between the loan tenure and EMI will be key.
Tips For Lowering Mortgage Rates
Check your credit score and compare it with the average borrower’s credit score. Potential lending companies will use this three-digit number to determine the risk involved with giving you a loan. This can be improved by paying off debt and always paying on time.
Build a record of employment. Showing that you have at least two years of steady earnings and employment will make you more attractive to lenders.
Start saving up for your down payment. Funding at least 20% of the downpayment is often enough to get a lower home loan interest rate. It also helps you avoid paying extra on mortgage since mortgage insurance is required for downs that don’t meet the minimum.
Build a cash reserve for paying off at least 2 months of mortgage payments.
Hold off on changing careers for now. Most lenders want to see some form of stability in your earnings and employment.
Pay your property taxes as a lump sum at the end of the year. It doesn’t affect how much you shell out, but it does effectively lower your mortgage payment since it’s no longer bundled in.
Owning a home is a huge financial responsibility that can catch you unprepared. Fortunately, there are many ways to lower your mortgage to hopefully get you into a better financial state.
If you’re struggling with making your mortgage payment, then it might be best to talk to a credit counselor. Contact us over at Wesley Mortgage, LLC to learn more about how we can help you lower your mortgage payment!