We all have good intentions when we set out to buy a home and on a budget for it. We imagine we are getting the amount we expect and we expect to pay bills on time … until life happens and things change. Careers change, things break down over time, and soon our monthly budget is a distant reminder of good intentions. You might want to take control of your finances, tighten your budget, and save money.
Whatever the reason, it is possible to save money on your monthly mortgage costs. We've put together a few strategies you can use to try just that.
What goes into a monthly mortgage payment
There are typically five main components to monthly mortgage payments: principal, interest, mortgage insurance (if you're paying less than 20% less), homeowner insurance, and property taxes. It is important to note that the actual cost will depend on the lender and the type of loan. These are just a few examples of the costs you may see on your mortgage statement.
Rector And interest
For most, when starting the home, most of your mortgage payment is used to pay interest. Over time, more of your payment will go towards the principal amount of the loan or the amount owed.
insurance And taxes
As a home buyer, you take risks by buying a home and lenders take risks by lending significant amounts of money to the public. Because of this, your lender will likely charge a monthly fee to protect their investment. Private mortgage insurance, or PMI, protects the lender when a homeowner defaults on their mortgage. On an FHA loan, it is known as a Mortgage Insurance Premium or (MIP).
Lenders also require that you keep home insurance up to date and within their specifications for the life of the loan. Lenders want to be sure that the home will retain its value in the event it has to be sold to get an overdue balance back if a homeowner defaults on their home mortgage.
Lenders also prefer that taxes be paid when they are due. Lenders will hold funds in trust to ensure that they are paid on time and are current. While a homeowner's mortgage can be paid and ongoing, the home may be mortgaged if taxes are not paid.
Now that we have an idea of what a monthly mortgage payment is, let's see how we can lower that amount.
Refinance your home
Refinancing your home is a great way to reduce your monthly mortgage payment if you are able to. You should keep a close eye on the market. If the interest rate is lower than your current mortgage rate, call your lender and discuss the refinance. If your current lender's interest rates are not as low as you would like, take the time to purchase the right loan product and interest rate that will suit your financial goals.
A lower interest rate could be all you need to make your budget bearable.
For example, Sam bought a home for $ 200,000 on a 30 year fixed loan. Sam's current interest rate is 4% and their lender can set an interest rate of 3%. If Sam chooses to refinance, they could save $ 112 a month.
Buy down the Interest rate with points
If Sam wanted to save even more, they could buy their rate down with points. Mortgage points are prepaid interest that is paid as part of your closing costs in order to obtain a lower interest rate. Each point corresponds to 1% of the loan amount. For example, with a $ 200,000 loan like Sam's, it would cost a point to close at $ 2,000. One mortgage point usually results in an interest rate reduction of 0.25% – .5%.
Refinancing can save you money, but be sure to look at the bigger picture. If you plan to live in your home for an extended period of time, you can save thousands by purchasing points to lower your interest rate over the life of your loan. If you're looking to sell in the near future, it might not be worth the extra charge.
Consider an adjustable one–Rate mortgage
If you are planning on refinancing, you can consider an ARM. A floating rate mortgage is a home loan with an interest rate that can change periodically as the market changes. Typically, the initial interest rate is lower than traditional lending rates for a fixed term. After the fixed income period ends, an ARM's interest rates can fluctuate based on the interest rate index that your lender is tracking.
You've probably heard of a 5/6 ARM that has a 5 year introductory period with the interest rate fixed. After 5 years, the interest rate can change every 6 months. Many lenders offer 5-, 7-, and 10-year options.
Before making the commitment, you should ask your lender how much the payments could increase after the introductory period, depending on how long you plan to stay in the apartment.
Make additional payments
When you have money to work with, there are several ways you can apply it to your mortgage to lower your monthly expenses.
Do A BigR. deposit
When buying a home, the down payment plays a huge role in the future cost of the home. The higher the down payment for a house, the less money the home buyer has to pay back. If you lower 20% or more of the selling price of a home, you will gain access to better loan terms and interest rates and reduce your monthly payment.
Make more payments
If you have a little extra cash from a part-time job or a new job, you can make extra payments on your existing mortgage. If you do, be sure to tell your lender that the additional payment should be applied to your principal amount. This won't help with immediate financial distress, but over time these payments add up and can reduce your monthly mortgage amount. You will also be able to own your home faster, or at least cut your loan by years, which will save you money in the long run.
Get rid of Öf PMI
If your down payment on a conventional loan was less than 20% of the sale price, you have likely paid, or are currently paying, PMI. Once a homeowner has accumulated 20% or more equity, they can contact their lender to have the PMI removed from their mortgage. Otherwise, it will automatically be replaced as soon as the home has reached 22% equity.
The PMI is between 0.05% – 1% of the total loan amount.
For example, for a $ 250,000 home with a 10% down payment and a 4% interest rate, the monthly PMI premium would be $ 140 per month or $ 1,687 for 1 year.
To remove PMI, lenders must follow Fannie Mae and Freddie Mac's Rules for Compliant Loans. If you think you have met the 20% equity requirement through additional payments, an increase in home value through renovations, or if you think your home has grown in value above the 20% threshold, apply PMI removal early on.
Government-supported loans like FHA, USDA, or VA don't charge a PMI. Instead, they can have mortgage insurance premiums, guarantee fees, or financing fees.
FHA borrowers who have made a down payment of 10% or more are required to pay an annual mortgage insurance premium for 11 years. If the borrower has made a down payment of less than 10%, they will have to pay the annual fee for the life of the loan.
With a USDA loan, you pay an upfront guarantee fee equal to 1% of the loan amount and an annual fee. Rocket Mortgage® does not offer USDA loans.
VA loans come with a financing fee. If the home buyer is a disabled veterinarian (or the eligible family member is disabled) and is receiving disability benefits, the finance fee may be waived. If a veteran or eligible household member took out a home loan prior to receiving benefits, they may be eligible for a finance fee refund.
Comparison shop for new home insurance
As mentioned earlier, lenders likely need a homeowner policy that is active and that matches their coverage needs for the life of the loan. Home insurance premium costs vary from state to state. The type of apartment and its location also play a major role in the monthly premium costs.
You can look for a better deal on your home insurance premiums. When receiving a quote, be sure to let the agent know if you've upgraded your security system or done any significant renovations that may have reduced your risk. The safer your home is from the elements, natural disasters and intruders, the cheaper your insurance premiums can be.
It is always a good idea to call your lender before starting your search for new home insurance. Lenders have minimum requirements that your new policy must meet. You should also be wondering how to change your home insurance as certain forms or additional coverage may be required. Plan carefully and save time and money.
Challenge your property tax assessment
Many homeowners do not know that they can challenge their property tax assessments. Your tax bill is based on the appraisal of the apartment by the local municipality. If a homeowner feels that their property has been overvalued, they can appeal the property valuation.
Many cities have a policy that the appraiser will automatically assign the highest possible value to the property type if a homeowner does not grant full access to the property. Check with the appraiser's office and see if you will be able to tour the property with the appraiser and allow them access to the interior and any other areas that you think may be able to complete your appraisal to be proven too high.
If you have exhausted the possibilities yourself, you can file a tax complaint. Filing a complaint will likely involve a small fee. Some homeowners choose to have their appeal filed with an attorney to ensure all deadlines are met and documentation is properly drawn up. You can hear something from the appraiser's office right away, but in most cases prepare to wait. In the case of such objections, it can take weeks to months for the reviewers to make a decision.
The bottom line: Stay focused
If you want to save some cash in your budget, you may be able to lower your mortgage payment through refinancing, get rid of mortgage insurance, or buy better interest rates. With so many options, it's important to focus on your long-term financial goals in order to lead you to success.
When you're ready to explore options, speak to Rocket Mortgage about the Mint Experience to see how you can lower your monthly mortgage payment.
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