For many people, that monthly mortgage payment can be their biggest recurring bill. It may be the main expense that guides the development and management of their monthly budget, because that is an important bill to pay on time.
Prevailing wisdom says that your mortgage payment shouldn’t be more than 28% of your gross (pre-tax) monthly pay. But whatever that sum actually is, you may be wondering how to shave down the amount. Think about it: A lower mortgage payment could reduce your financial stress. And it can also open up room in your budget to allocate more money towards shrinking other debt, pumping up your emergency fund, and saving for retirement or other goals.
Here, you’ll learn more about your mortgage payment and possible ways to lower it.
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Key Points
• Lowering your mortgage payment can free up funds for other financial goals like debt reduction and savings.
• Refinancing can secure a lower interest rate, reducing monthly mortgage costs.
• Making extra payments toward the principal can decrease both the term and total interest paid.
• Renting out part of your property can generate income to cover mortgage payments.
• Removing private mortgage insurance or appealing property taxes can reduce monthly expenses.
What Is a Mortgage Payment?
A mortgage payment is a sum you typically pay every month, but it’s more than just a bill. It reflects an agreement between you and your lender that you have borrowed money to buy or refinance a home, and in exchange, you’ve agreed to pay back the sum with interest over time. If you fail to keep up with your payments, the lender may have the right to take your property.
There are typically four parts of your monthly payment: the loan principal, the loan interest (which is how the lender makes money), taxes, and insurance fees.
A mortgage payment may be a fixed rate, meaning your payment stays the same, month after month, year after year. Or it might be an adjustable rate, meaning the interest and therefore the payment can change at regular intervals.
Pros and Cons of Lowering Your Mortgage Payments
There are upsides and downsides to lowering your mortgage payments.
On the plus side, lowering your mortgage means you likely have more money to apply elsewhere. You might apply the freed-up funds to:
• Pay down other debt
• Build up your emergency fund
• Put more money towards retirement savings
• Use the cash for discretionary spending.
On the other hand, there are downsides to consider too:
• You might wind up paying a lower amount over a longer period of time, meaning your debt lasts longer
• You could pay more in interest over the life of the loan
• If a lower monthly payment means you are not paying your full share of interest due, you could wind up in a negative amortization situation, in which the amount you owe is going up instead of down.
6 Ways to Lower Your Mortgage Payments
Now that you know a bit about how mortgage payments work and the pros and cons of lowering your mortgage payments, consider these ways you could minimize your monthly amount due.
Recommended: How to Pay Off a 30-Year Mortgage in 15 Years
1. Give Your Mortgage a Bonus
If you get a bonus or a windfall, consider throwing some of that money at your mortgage. If you are in a position to make a major lump-sum payment on your home loan, you may benefit from mortgage recasting.
With recasting, your lender will re-amortize the mortgage but retain the interest rate and term. The new, smaller balance equates to lower monthly payments. Worth noting: Many lenders charge a servicing fee and have equity requirements to recast a mortgage.
Other similar options:
• Make a lump-sum payment toward the mortgage principal (say, if you inherit some money or get a large bonus at work)
• Make extra payments on a schedule or whenever you can.
It’s a good idea to tell your lender that you want to put the extra money toward the principal and not the interest. Paying extra toward the principal provides two benefits: It will slowly reduce your monthly payment, and it will pare the total interest paid over the life of the loan.
Refinance your mortgage and save–
without the hassle.
2. Reap Rental Income at Home
You could lower how much you pay out-of-pocket for your mortgage by bringing in rental income and putting it towards that monthly bill. You’re not lowering how much you owe, but you are using your home to bring in another income stream.
There are two common methods: “house hacking” (generating income from your property) and adding an accessory dwelling unit (ADU).
• House hacking can mean buying a two- to four-unit multifamily building for little money down and living in one of the units. Multi-family homes with up to four units are considered residential when it comes to financing. Owner-occupants may qualify for and opt for Federal Housing Administration (FHA) loans, Veterans Affairs (VA) loans, or conventional financing.
Some people house-hack a single-family home, which just translates to having housemates or short-term rental guests.
• An ADU is another option for bringing in rental money to use towards your mortgage. This secondary dwelling unit on the same lot as a primary single-family home could be a detached cottage, a garage or basement conversion (that is, an in-law apartment or similar), or an attached unit.
With any planned addition or renovation to create an ADU, you might want to estimate return on investment — how much you’d charge and how long it would take to recoup the cash you put in before turning a profit.
3. Extend the Term of Your Mortgage
If your goal is to reduce your monthly payment — though not necessarily the overall cost of your mortgage — you may consider extending your mortgage term. For example, if you refinanced a 15-year mortgage into a 30-year mortgage, you would amortize your payments over a longer term, thereby reducing your monthly payment.
This technique could lower your monthly payment but will likely cost you more in interest in the long run.
(That said, just because you have a new 30-year mortgage doesn’t mean you have to take 30 years to pay it off. You’re often allowed to pay off your mortgage early without a prepayment penalty by paying more toward the principal.)
4. Get Rid of Mortgage Insurance
Mortgage insurance, which is needed for some loans, can add a significant amount to your monthly payments. Luckily, there are ways to eliminate these payments, depending on which type of mortgage loan you have.
• Getting rid of the FHA mortgage insurance premium (MIP). Consider your loan origination date that impacts when you can get rid of the extra expense of mortgage insurance:
• July 1991 to December 2000: If your loan originated between these dates, you can’t cancel your MIP.
• January 2001 to June 3, 2013: Your MIP can be canceled once you have 22% equity in your home.
• June 3, 2013, and later: If you made a down payment of at least 10% percent, MIP will be canceled after 11 years. Otherwise, MIP will last for the life of the loan.
Another way to shed MIP is to refinance to a conventional loan with a private lender. Many FHA homeowners may have enough equity to refinance.
• Getting rid of private mortgage insurance (PMI) If you took out a conventional mortgage with less than 20% down, you’re likely paying PMI. Ditching your PMI is an excellent way to reduce your monthly bill.
To request that your PMI be eliminated, you’ll want to have 20% equity in your home, whether through your own payments or through home appreciation.
Thinking about starting a new home renovation project? Use this Home Improvement Cost Calculator to get an idea of what your project will cost.
Your lender must automatically terminate PMI on the date when your principal balance reaches 78% of the original value of your home. Check with your lender or loan program to see when and if you can get rid of your PMI.
5. Appeal Your Property Taxes
Here’s another way to lower your mortgage payments: Take a closer look at your property taxes. Your property taxes are based on an assessment of your house and land conducted by your county’s tax assessor. The higher they value your property, the more taxes you’ll pay.
If you think you’re paying too much in taxes, you can appeal the assessment. If you do, be prepared with examples of comparable properties in your area valued at less than your home. Or you may also show a professional appraisal.
To challenge an assessment, you can call your local tax assessor and ask about the appeals process.
6. Refinance Your Mortgage
One of the best ways to reduce monthly mortgage payments is to refinance your mortgage. Refinancing (not to be confused with a reverse mortgage) means replacing your current mortgage with a new one, with terms that better suit your current needs.
There are a number of signs that a mortgage refinance makes sense, such as lower interest rates being offered or the desire to secure a fixed rate when you have an adjustable rate mortgage.
Refinancing can result in a more favorable interest rate, a change in loan length, a reduced monthly payment, and a substantial reduction in the amount you owe over the life of your mortgage. Do note, however, that there are often fees for refinancing your mortgage.
Tips on Lowering Your Mortgage Payment
If you’re serious about lowering your mortgage payments, consider these methods:
• Refinance to get a lower rate or other changes in your mortgage’s terms
• Apply a windfall (a tax refund, say, or a bonus) to your mortgage’s principal
• Reach enough equity in your home to drop mortgage insurance
• Make extra mortgage payments or higher mortgage payments (this can build equity or pay off the loan sooner, saving you interest)
• Ask about loan modification or forbearance programs if you are struggling to make payments.
Recommended: First-time Homebuyer Programs
The Takeaway
How to lower your mortgage payment? There are several possible ways. And who wouldn’t love to shrink their house payment? You might look at strategies to build equity and ditch mortgage insurance, extend the terms of your loan, or refinance to reduce your monthly payment.
If refinancing could help, see what SoFi offers. Both refinancing and cash-out refinancing are possible. And SoFi also offers a range of flexible home mortgage loans with competitive rates to help you make homeownership that much more affordable. Plus, our online process is fast and simple.
Ready to see how much simpler a SoFi Home Mortgage Loan can be?
FAQ
How can I make my mortgage payment go down?
There are several ways to lower your monthly mortgage payment. A few options: You could refinance at a lower rate or longer term, or you could build enough equity to forgo mortgage insurance.
How can I lower my house payment without refinancing?
To lower your house payment without refinancing, you could appeal to lower your property taxes; you might apply a windfall to lower your principal; or you could rent out part of your property to bring in more income.
What is the average mortgage payment?
According to the C2ER’s 2022 Annual Cost of Living index, the average monthly mortgage payment in the U.S. is $1,768.
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