5 Ways to a Lower Mortgage Payment, According to a Realtor
Are you buying a home soon? If you are, then you probably want to get the most for your money at the lowest cost, including your monthly mortgage.
Since mortgage loans are the way most people buy homes today, it’s important to know how to get the lowest mortgage payment possible.
5 Ways to a Lower Mortgage Payment, According to a Realtor
What many home buyers may not understand is that until a mortgage is finalized and closed, most home buyers have some control over what their monthly mortgage payment will be.
Shop Around for a Mortgage
Lenders tend to look at a lot of similar factors when they consider a home loan application. They examine your income, assets, debt, employment history and credit record to decide what kind of candidate you are for a mortgage loan.
However, you would be mistaken to assume that every lender will offer you the same loan terms. Many would-be home buyers seem to make this erroneous assumption, 77 percent of borrowers only apply to one lender.
If you want to know what is the best loan you can get, invest the time and a little money into researching and applying to a few different lenders. You may save thousands by getting a loan with a lower interest rate, or other more favorable terms.
The tale of two mortgage pre-approvals
A successful real estate agent tells the story of how he worked with a couple to help them buy their first home and they went to their local bank to secure a mortgage. The couple had a checking account at the bank and had occasionally received notices about the bank’s mortgage department. After visiting with the mortgage banker, and supplying her with certain documents, the couple received a mortgage pre-approval from the bank.
However, after forwarding the pre-approval to their real estate agent, the agent commented that the rate and closing costs seemed a bit high. He suggested the couple visit a local mortgage broker for a second quote.
The agent further explained that mortgage brokers are not the same as mortgage bankers as they must be licensed and often have access to a greater variety of mortgage products than those offered at a bank.
After visiting with the new mortgage broker, and supplying the same information, the couple received a lower interest rate — and with fewer closing costs — than the large national bank offered.
Consider Different Loan Types
Most home buyers have probably heard from friends and family members that the 30-year fixed-rate loan is the only way to go. While it is nice to know that you will have the same predictable monthly payment for the duration of the loan, it is not the sole viable option for prospective borrowers.
Depending on your current assets and income, and if you expect a long career of increasing pay, an adjustable-rate loan may be just as practical as a fixed-rate mortgage in some situations.
Related >> Use a mortgage calculator to find out your monthly mortgage payment.
Adjustable-rate loans start at a typically lower rate for a term of a few years, then they can fluctuate over time. A lower initial interest rate than a fixed-rate loan could allow you to get into a better home at first.
Once your income has reached a higher level, you may refinance into a fixed-rate loan, if that works better for you. Discussing your options with your lender will help you understand how each kind of loan will be structured in your specific situation.
TIP: If you plan on only staying in the home less than 5 years, consider the lowest interest rate product for the first 3-5 years. Be sure and check that there is no pre-payment penalty or additional interest charges should you sell the home before your mortgage interest rate begins to rise.
Watch Interest Rate Trends and Lock It In
Mortgage interest rates have been fluctuating around 3.5 to 4 percent for a 30-year fixed-rate loan since 2013. However, certain actions, such as the Federal Reserve raising the federal funds rates, can slowly increase mortgage interest rates. When the difference from week to week is only a few hundredths of a point, you might not see much effect in locking in a rate.
Historically, the loan market is hard to predict, however. If you can see that rates are going up over a long period of time (and many experts say that they will be), you may want to submit your application and lock in an interest rate as soon as you can. Rate locks usually last only about 60-90 days, so you should be prepared to buy a home when you arrange the lock.
Consider Paying Discount Points
Even if you are very well-qualified and receive the best mortgage loan the lender has to offer, you can still take your interest rate down by a little by paying discount points. In this scenario, you pay a percentage point of the total loan at closing in exchange for the lender dropping your final interest rate.
The standard drop is a quarter of a percent, but the lender may have some flexibility in its terms related to discount points. If you are trying to decide between a 30-year fixed-rate loan and a 15-year loan, a lower interest rate would drop your monthly payment. That may make it easier to choose the quicker payoff.
Eliminate Private Mortgage Insurance
If the percentage of your loan in relation to the home’s value exceeds 80 percent, you may have to pay private mortgage insurance (PMI). This insurance protects the lender in the event that the borrower defaults, and could cost you as much as 1.5 percent of the total loan each year. On a $200,000 loan, that could be an additional $250 payment added to your mortgage each month.
TIP: Avoid PMI by making a larger down payment of at least 20 percent of the home’s purchase price or by getting a second mortgage for the remaining percentage above 80 percent. If neither of these are possible, then plan to refinance as quickly as possible once your equity rises above the 20 percent mark.
Your home purchase is a major investment, but that does not mean you will have to empty your bank account to make the mortgage payment each month.
By using any or all of these different approaches and tips, you can give yourself as much flexibility as possible to lower the monthly payments on your mortgage loan.
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There are 6 comments to "5 Ways to a Lower Mortgage Payment, According to a Realtor".
I’ve never considered getting two mortgages to avoid payihng PMI.
Here is some feedback on this article:
1. Shopping around- pre-approvals generally provide an estimate of costs. In order to compare true costs, you will need to get a “Good Faith Estimate”. Lenders are required to hold to the fees lists on a Good Faith Estimate, so they will put down real numbers. Generally, most of your closings costs will be in Title Fees. You can shop for your lender’s fees, but you may be disappointed by how competitive they are- within $100 of each other. Here is something to consider- Banks and Credit Unions will usually have lower fees, but you will likely have a horrible experience getting to the closing table on time. Brokers can charge you whatever they want to make whatever margin they want on the deal. You will also likely be pushed into an undesirable loan. It may be hard to trust them. Also, they will need to source underwriting and sale of the loan, so an on-time closing may be out of the question. It’s more risky to work with a broker.
2. Loan Types- Get 3 loan type quotes- 30-year fixed, Adjustable Rate, and a 20 to 15-year Fixed. If you don’t have 20% down, ask for Lender-paid PMI and Borrower-Paid Financed PMI as well. People are afraid of Adjustable Rate Mortgages, but you may come out with more equity in 5 years by taking that option. If your lender can’t compare the loan programs over time, they are probably not very good at what they do.
3. Interest Rates- A good rule of thumb is to lock as soon as possible. Would you feel better about getting a 0.25% better rate (about $40 per month less payment) or worse about a 0.5% worse rate, because you gambled on rates. Here’s a dirty secret- no one can predict rates.
4. Discount Points- NEVER pay discount points yourself. If there are seller-paid closing costs, use some of that money as discount points to lower your rate. Otherwise, you are simply paying more for your mortgage. Most people refinance their home or move within 4 years. You recoup discount points in 6-7 years on average. You lose money. Banks love it!
5. PMI- there are great options for getting rid of PMI. Ask you lender about Lender-Paid PMI, Up-front financed PMI, and 2nd mortgages to cover PMI. The 2nd mortgage is the more expensive option, usually. You will take a higher interest rate on a 2nd, often 1-2%. Depending on the size of your loan, it is cheaper to roll the PMI up front into your loan amount at your mortgage interest rate.
It’s very useful…
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Interesting post, thanks for sharing! People have been underestimating how much money they can save when refinancing their car loans. Would you be interested in co-authoring an article on “5 Ways to a Lower Car loan Payments Through Refi”?
If you already own your house and are in a position to throw a large (or medium) chunk of money at the principal ahead of schedule, mortgage recasting may make sense.
Essentially, recasting considers the amount of extra principal you’ve paid and adjusts your monthly payment accordingly. Your total amount owed and payoff date don’t change, but month-to-month you’re saving a bit.
Every lender has different rules about recasting – how you can be eligible, any fees you have to pay, etc.