Ways to lower your mortgage installment

The 2009 real estate market crash caused chaos. People were being laid off from their jobs and couldn’t afford their mortgages, which were now running out. Interest rates have been lowered to help stabilize the market. They rose and then fell again in 2021, after the pandemic, to spur borrowing.

It was a great time to buy a house. Let’s say you were able to purchase a $750,000 home with a 20% down payment of $150,000 and an interest rate of 3.885% on a 30-year loan. Your monthly payment will be $2,825 per month, excluding taxes, insurance and other fees. The same loan with an interest rate of 6.885% will cost $3,946.

The good news for borrowers is that the Fed’s recent interest rate cut means it’s cheaper to borrow money. Staci Pratt is a mortgage broker and real estate agent from California who says that the last time money was cheap, home prices skyrocketed. “It was really hard for people to buy.” However, he thinks this time is different. “I anticipate it will be a gradual reduction, but the reduction will happen.”

But for those who are currently paying off their mortgage, regardless of when they purchased their homes, here are some steps to consider to lower your monthly bill.

Get rid of your mortgage insurance

I received a letter from my lender saying that the house I bought in 2018 had appreciated and it was possible to cancel my PMI (private mortgage insurance), which was paying me $92 a month. After the appraisal, the bank determined that the value of my home had indeed increased to 80% or more of the loan value. That’s the magic number: If you put less than 20% down on a conventional 30-year loan, you’ll also be charged PMI. I asked Pratt if PMI was a scam. After all, won’t they get my house if I default?

Pratt explained, “What if you overpaid and went under?” In 2009 this happened often. PMI is a payment that helps the bank feel better if you default on your underwater mortgage. On the other hand, if you have a loan but don’t have 20% down, PMI could be the difference between owning a home or not.

Credit karma has a calculator to help you calculate this, and a better credit score means a lower PMI. You may have to do some math to figure out whether you want to roll over that extra money to save for a down payment on a home later, or whether having a home that you’re likely to appreciate is worth the extra money every month. This is a great conversation to have with your mortgage broker or financial professional.

Refinance

Yes, refinancing can be expensive. If you’re planning on moving in a year or two, it may not be worth it. However, if you plan to own the property for a long time, it may be a wise move. Look closely at the numbers to see at what point you’ll recoup those costs and start saving.

Pratt suggests talking to a mortgage broker about your options – even a percentage point or point and a half could mean a significant drop. Your PMI is also reassessed because refinancing comes with a new assessment.

Keep in mind that refinancing resets the clock. If you plan to pay off your loan within 10 years, you’ll need to start the schedule over again, depending on the terms of your new mortgage.

Reverse mortgage

This is a solution for older home owners who want to realize the value of their home without having to sell it – the mortgage company takes over the lien and pays the borrower regular installments. Borrowers must be at least 62 years old and go through a screening process to make sure they understand how it works. If the borrower only survives a year or two after obtaining a reverse mortgage, there will likely still be equity in the home. But, Pratt says, if a borrower gets a loan at age 70 and lives to, say, 120, collecting payments the whole time, the mortgage company makes a loss. This is also one of those transactions you need to be completely clear about if you plan to leave the home to your heirs.

Mortgage loan transformation

This is an option for people who have a large amount of money from savings, an unexpected profit or a withdrawal from another investment. Pratt uses the example of someone taking out an $800,000 loan on a new home before selling their current home. When the first home sells a few weeks later and the borrower has $300,000 in cash, he or she can pay that amount off on the existing mortgage, bringing the new loan amount to $500,000. At a 6% rate for 30 years, the monthly payment would drop from $4,796 to $2,998.

Evaluate insurance and taxes

Many borrowers choose to include property taxes and home insurance in their monthly payments. Check with your insurance agent to make sure you’re getting the right coverage at the best price. If the value of the property has decreased, it is worth asking the tax office for a lower estimated value; many people did this successfully during the 2009 crash. But know that it can also backfire if the county reassesses your property for a higher value and you end up paying more in taxes.

One last thought

Do today’s low interest rates mean we are at the beginning of a downward trend? You can take a “wait and see” approach, but never take anything for granted. “I wouldn’t advise anyone to play and wait because interest rates change every day. And you can always restart your computer in 6 months or a year,” Pratt says.

Almost every purchase is a guess – will the price of eggs drop tomorrow? Will this car company offer a huge discount next month? However, the best way to move any money is to learn as much as you can about how any changes will affect your situation before you sign a stack of documents. Math isn’t always fun, but it’s definitely your friend.