So.. you bought your house years ago, and then you lived happily ever after… You wish! In reality, home ownership can be when the madness begins. A mortgage depends on your life to be in the constant state it was when you first purchased your property: same job, same income, same expenses, same spouse etc. Of course you know by now that life changes every 15 days; let alone every 15 or 30 years. This could make managing your mortgage payment a task. Here’s a few ways to manipulate that mortgage payment to make your life a little more stable.
1. Reduce Taxes and Insurance
Your monthly mortgage payment consists of principal and interest, taxes and insurance, and possibly private mortgage insurance. The taxes, insurance, and mortgage insurance make up what’s called the escrow portion of your payment. The escrow account is the account used by the bank to pay those bills mentioned above. The amount needed may vary from year to year. This means your payment can change based on the amounts needed to satisfy them. Example, real estate taxes are determined by your local county estimating the value of your property and the land it rests on. If properties are selling competitively on the market in your area, property taxes will usually increase.
Similar to Taxes, insurance rates in your area may fluctuate depending on factors such as crime rate, natural disasters, new development, building materials, recalls, new population risk, etc. However, you can influence the taxes and insurance factors of your payment. If you do not agree with the assessment value of your land, you can contact your county for an individual assessment. You can also see if you qualify for a tax abatement (The Homestead Act). Your property will be taxed at a discounted rate.
With insurance, you have the right to shop around for the lowest rates. Find a better/cheaper coverage policy, and provide it to your mortgage company for them to pay. This will reduce your required escrow payment amount.
2. Escrow Account Removal
Sometimes depending on where you live, your escrow payment can make up the majority of your mortgage payment. If you’re good with saving money and handling your own financial responsibilities, you may want to consider asking your mortgage company to remove the escrow account requirement. This would be beneficial to those who could use the money immediately but have access to large sums of money on particular dates like annuities, retirement checks, tax refunds, rents, investments etc.
3. Private Mortgage Insurance removal
Many mistake private mortgage insurance for their homeowners insurance. Some even mistake it as a life insurance perk in case a borrower passes away. Mortgage insurance is neither. Mortgage insurance insures that the lender and the lender only is repaid in the event of the borrower defaulting. So the bank makes the borrower pay an additional premium to their mortgage payment in case they were to default. Those who do not have at least 20% equity (ownership) are considered a higher risk to the bank of defaulting.
One way to reduce your payment is getting the mortgage insurance removed. You can do so in the following ways: 1) pay the premium in full. Prior to a loan being given, PMI premiums can be paid in full or included monthly along with your mortgage payment. 2)pay for an appraisal: If the value of your home has increased, you will have more equity . The closer you are to owning 20% percent of your home… the better, or 3)Lastly, good payment history: 30 year Fha loans originated before June 2013 are eligible for MIP removal after five years of good payment history. Some types of loans only require 2 years of good payment history.
4. Recast
If you ever came across a large sum of money, let’s say $25,000. It may not be enough to pay-off a mortgage completely, but you may want to pay down your mortgage. You could make a large principal payment and have the remaining balance re-amortized (stretched to your maturity date). This is called a recast. This would reduce your principal and interest portion of your payment. Example: If your original mortgage balance was $100k with 100 payments= your payment would be $1,000 per month. Now make a $25k recast payment. Your mortgage balance will now be $75k divided by 100 payments. Your new monthly payment would be $750 per month instead of $1000. You will also gain more equity.
A recast is a solution before refinancing. You keep the same interest rate but lower the principal balance which saves you money on accruing interest over time. Most banks charge a single fee of $500 or less for a recast which allows you to avoid expensive closing costs of refinancing to getting a new loan.
5. Refinance
Last but not least… your only other option may be to refinance. Some say this is like purchasing your house again but it depends on how much you can benefit from the transaction. If you bought your house with an interest rate between 5-8% or above, it may be worth it for you to do today because the average rate is near 4%. Also if you bought your home in the recovering Real Estate Market, this maybe a good opportunity to refinance your home at a higher appraised value. Private Mortgage insurance is added to loans with a loan to value ratio of 80% or higher. To remove it, your loan must represent less than 80% of the appraised value of your home.
Since the market crash of 2008, homes have re-gained significant value. Refinancing would be a solution for someone with excellent credit but doesn’t have a large enough sum of money for a recast. Also, if you’re midway through your loan and had a high interest rate to begin with, this can significantly change your payment for the better. Depending on how bad a company needs business, some lenders will even offer to pay your closing costs. However with refinancing, you will be required to go through the entire mortgage signing process as you did when you first purchased the home. (Here’s an in-depth guide on refinancing your mortgage.)
Conclusion
These are just a few ways to control or reduce your mortgage payment. Nothing in life stays the same. If you ever find yourself behind a few payments, you could also request a loan modification through loss mitigation if the mortgage causes you a financial hardship. Also another useful strategy is paying biweekly. Have half of your mortgage payment automatically deducted every two weeks. This works well when you are paid a paycheck bi-weekly.
Bi-weekly payments can cut off an average of 5-7 years on a mortgage. Paying bi-weekly essentially adds 1 full payment to principal each year due to the two times a-year that there are 3 paychecks issued within a month. While this method doesn’t reduce your mortgage payment, this strategy may help you mentally budget and reduce financial stress. The purpose of this article is for you to know that you have options. Please Share with other friends who are homeowners!
