A mortgage payment is a significant expense – one of the biggest burdens on a household budget. Saving even a small amount on it can add up within a year and over the years. Perhaps lowering a mortgage payment is not a question of just saving money, but surviving and avoiding foreclosure. Fortunately, there are several methods that mortgagees can exploit to reduce the burden of the monthly payment.
♦ Refinance
Refinancing is not an option for everyone, especially as it has eligibility requirements. One such requirement is that the property has at least 20% equity. Usually, a refinance effectively reduces the mortgage payment if it is lower than the current mortgage interest rate by at least two or three points. This is because refinancing incurs additional mortgage fees that must be offset by the reduction in mortgage payments.
♦ Refinance to an interest-only mortgage
Interest-only mortgages typically lead to the “balloon payment.” However, refinancing to one of these can make it easy to avoid foreclosure in difficult times. The interest-only mortgage does not amortize part of the principal and the interest – just the interest alone. The major demerit of this option is the hefty payment at the end of the loan.
♦ Loan modification
A loan modification refers to a permanent change in a minimum of one of the terms of a mortgage loan. Loan modification is, therefore, manifested in a number of different ways:
• Increasing the amortization period
• Reducing the interest rate
• Reducing the principal
• Introducing limits (or caps) to monthly payments
• Mortgage forbearance
• Reduction in penalties
All the aforementioned reductions serve to reduce mortgage payments significantly. Introducing caps or modifying the limits on monthly payment is designed to prevent increase in floating interest rates that could be payments a burden on the mortgagee. Interest rate reduction can usually be administered by changing from an adjustable rate mortgage to a fixed-rate mortgage or from even a mandated reduction in interest rates. Loan modification is distinct from refinancing and could involve negotiation with the lender. Lenders are eager to reduce the risk of foreclosure and would be inclined to work with mortgagees to achieve a favourable outcome.
♦ Make overpayment
Overpayment is not an option if one is struggling to make payments in the first place. However, in times of abundance, this can be a good strategy to reduce mortgage payment. However, lenders want to protect their interest (literally), so there are stipulated limits on overpayment.
♦ Remove mortgage insurance from the payment
Many lenders require mortgage insurance as part of the mortgage arrangement. Specialized mortgage insurance plans are usually more expensive than term insurance. You can remove this additional cost at the inception of the mortgage by shopping around for better term insurance deals. On the other hand, you can also eliminate this cost from the mortgage payment completely. Lender might allow this when at least 20% of the mortgage balance is paid off.
♦ Making Home Affordable Plan (MHAP)
The MHAP plan was enacted in 2009 in response to the housing crisis precipitated by a prior recession. Many homeowners faced difficulties in the recession and, because of the decline in the market value of their home, were simply unable to refinance. This plan offers help to Americans in the form of refinancing, modification, and foreclosure. It used some of the methods previously outlined, but this involves federal assistance.
♦ Flexible mortgage
Taking a flexible mortgage in the first instance means that you have the option to reduce the payment in accordance with your budget. A genuinely flexible mortgage allows the mortgagee to overpay, underpay, take a break from payments, and even borrow back previous overpayments. These options can definitely reduce the mortgage payment burden.
Some methods of reducing your mortgage payment are costlier than others. Your eligibility and financial circumstances would dictate what the best options at a given time are. This list of methods is not exhaustive, but illustrates the plethora of options for saving money or keeping up with your financial obligations.