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10 Ways to Lower Your Mortgage Payment

Posted by Sarah Steen on July 25, 2022
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10 Ways to Lower Your Mortgage Payment

 

Rising interest rates in the second quarter of 2022 have had a significant impact on the Colorado Springs real estate market. It might feel like having a lower mortgage payment is out of reach now that you can’t just refinance to a lower interest rate. But there are other options for you to lower your mortgage payment!

Click here to download the Home Buying Guide

Current Real Estate Dynamics

In the Colorado Springs real estate market, excess buyer demand has cooled and home prices are steady or coming down in some cases. What a relief for buyers! Well, kind of. This was a necessary shift in our real estate market after the frantic, unsustainable pace of the last two years. Buyers could have less competition and more options as our inventory grows to more normal levels.

But the main reason for this market shift is the interest rate increases that went from cozy high 2s to painfully high 5s in about 6 months.  Buyers are shocked. They may find themselves in a situation where they no longer qualify for a mortgage or can’t afford their estimated monthly payments.  As a result, many buyers have withdrawn from the market to reassess their situation.

Meanwhile, homes are sitting on the market during the busiest real estate season of the year and sellers are forced to readjust their expectations and their list price. June typically has the highest average sales price because it is the busiest real estate month for Colorado Springs. But our highest sales price so far in 2022 was in April when we had extremely low inventory and a rush of buyers trying to get into a home before interest rates increased again.

To give you an idea of just how much the increased interest rates have impacted buying power, a monthly mortgage payment on a $500,000 house could potentially be $1100 more than it was 6 months ago. It’s a shocking difference. But there are strategies to lower your mortgage payment if you’re already a homeowner, or to keep your future payment as low as possible if you’re planning to buy in the near future.

Related Reading: Tips for Choosing a Lender

How to lower your mortgage payment if you already purchased a home.

1. Remove PMI if you can.
If your down payment was less than 20% and you don’t have a VA loan, you are paying for private mortgage insurance (PMI) each month. Find out how much equity you have in your home. Feel free to reach out to us for a complimentary home valuation. If you have more than 20% of equity, reach out to your lender and ask them to remove your PMI. Requirements for this process are lender specific but it is worth the effort. It can lower your mortgage payment by $120+/month depending on your loan amount.

2. Recast your loan.
A recast is when the borrower pays down their loan principal and the lender recalculates the loan payment based on their decreased principal amount. This can be a bit more challenging. There are specific requirements for recasting:

  • Minimum requirements for the sum amount you plan to apply toward your principal to recast your loan.
  • Some loans have a recast clause prohibiting this method of lowering your monthly mortgage payment.
  • Recasting is only possible on conventional loans (no government or negative amortization loans, etc.)
  • Call your lender to get information about a recast. If this works for you, a recast can significantly lower mortgage payments.

3. Revisit your homeowner insurance rate.
Buyers often find themselves overwhelmed during the home buying process and don’t have much time to shop around for homeowner’s insurance. Now that the dust has settled on your purchase, it’s a great time to explore the best rates and coverage. You’ll want to avoid lowering the insurance coverage, but you might be able to save money by switching insurance companies or bundling several insurance policies together. In fact, it’s a good idea to annually review your insurance coverage and shop rates to ensure your replacement values are still accurate and lower rates when it makes sense.

4. Appeal your taxes.
You’ll want to appeal your property taxes if you feel that they weren’t assessed accurately. Property taxes are assessed based on your home’s square footage and assessed home values. You have the right to appeal if the tax assessor (El Paso county, Teller County, Pueblo County ) listed a higher amount of square footage or you feel that the market value is assessed too high.

Property tax appeals have to be done during a very specific time window in the year. In El Paso County, you will receive an evaluation in mid-January and homeowners usually have until the end of June to appeal any assessments, value, or measurements. You can file your claim directly from your property tax assessor website. A successful appeal won’t have a huge impact on your monthly mortgage payment, but could make a big difference when combined with other suggestions for lowering your payment.

5. Sublease a room or portion of your property.
While this isn’t a direct way to lower your mortgage payments, it will subsidize your payments until you are ready to carry the full mortgage payment, can refinance, or sell your home. You could get a roommate or rent out part of your garage or property for RV parking. We recommend professional and legal advice to prepare paperwork in order to have a steadfast agreement with your sublease tenant.

Related Reading:
How to Appeal Your Property Taxes
Choosing Homeowner’s Insurance
Steps to Buy a Home

How to buy a home with a lower mortgage payment (even with high interest rates).

6. Choose a home with a low tax rate and low/no HOA fees.
You can save $200+/month depending on the taxes and HOA fees for the house you select. Generally, areas less than 20 years old and new construction neighborhoods have higher property tax rates. The higher tax rates are charged to offset the city’s infrastructure installation costs for streets, sewer lines, schools and more. Taxes can be $3000 for a home in a new area compared to $1500 in older part of town.

HOA fees will add to your monthly payment as well. These fees vary depending on the neighborhood, and some areas have more than one HOA. You can find information for HOA fees and property taxes in listings so pay close attention: these expenses add up!

7. Apply your appraisal gap funds toward your loan.
An appraisal gap is when the sales price is higher than the appraisal price for a real estate transaction. Lenders will only fund a loan amount for the appraised value. So, if the contract price on the home is $400,000 but the appraisal is $390,000, there is a $10,000 appraisal gap. Before the recent shift in the market, it was common for buyers to use cash to pay the appraisal gap. Buyers would frequently have to pay $10,000 or more to cover appraisal gaps in our market. Appraisal gaps have started disappearing as competition has cooled, but this cash could instead be used to lower your monthly mortgage payment. You could apply it to your down payment to reduce your principal loan amount, or use part of it to buy down your interest rate.

8. Ask for Seller Contributions (owner occupied purchases only)
Be strategic when negotiating terms for your contract. If you negotiate with the seller to reduce the sales price of your home, it will probably have very little impact on your monthly payment. Work with your real estate professional to strategize about which options might work for your particular situation.  There are a few different ways that seller contributions can lower your monthly mortgage payment:

  • Seller contributions toward closing costs or buying down your interest rate. If you request a $10,000 price reduction, it could reduce your monthly payment by just $60 depending on your loan terms. But a $10,000 contribution toward your closing costs or buying down your interest rate could reduce your monthly payment by $250/month or more. Keep in mind that interest rate buy downs have lender requirements, limits, and can come in various versions (temporary versus permanent). Depending on the loan to home value amount, conventional loans have a 2-9% seller contribution cap. FHA loans allow the seller to pay up to 6% and VA allows up to 4% in Interested Party Contributions.
  • HOA fees. You can request that the seller prepay a years’ worth of HOA fees.
  • The seller can prepay property taxes for the rest of the year.
  • Keep in mind that whatever terms you choose to request, all contributions have to be within the “Interested Party Contributions” limits of your loan. It’s important to strategize with your lender so they can help you pick which loan and which type of buy down is best for you. It’s a huge advantage to have these discussions with your lender before offering on a home. This will enable to you to ask the seller for the exact amount and type of contributions you need when you submit your offer.

9. Select a more suitable loan option.
Every buyer’s purchase situation is different. But all buyers want to get the most for their money, especially now that borrowing money is much more expensive with increased interest rates.  We’ll say it again: it’s important to shop around for lenders and have frank conversations about what your mortgage goals are.

Buyers searching for lower mortgage payments have rediscovered adjustable rate mortgages. The 2008 housing crash gave adjustable rate mortgages a very bad reputation. These loans pushed homeowners beyond affordability and contributed to the high rates of foreclosures during that crash. But adjustable rate loans can definitely be an option for buyers hoping to lower their monthly mortgage payment. Buyers need to make sure they learn about ALL of the information regarding this type of loan, weigh the pros and cons, and make a well-informed decision. The key is to have a trusted lender lay it all out for the buyer.

There is also the option to buy down your interest rate temporarily like a 2/1 buydown.  This is a common incentive from builder’s preferred lenders with new construction homes. The builder pays for a decrease of the mortgage rate by 2% the first year, 1% the second year, and in the 3rd year the interest rate is back to the current interest level. Just like with all financing options, it is very important to understand the pros and cons of this scenario

10. Assume your seller’s loan
Most sellers right now purchased or refinanced their home at a much lower interest rate than what is currently available. Don’t you wish you could have that interest rate? It is possible! You can assume the seller’s loan if they currently have a government loan (VA, FHA, USDA). There are specific requirements and qualifications to assume a seller’s loan. You also might need an additional loan or down payment funds to cover the gap between the loan you’re assuming and the contract price.  Most conventional loans are not assumable, but it’s worth asking the seller’s agent.

Related Reading:
Tips for Choosing a Mortgage
Home Buying: 10 Things You Might Not Know
Making an Offer

But should I buy a house now?

The decision to rent or buy depends on your specific situation. It’s probably a good time to buy if you’re financially ready and planning to stay in Colorado Springs for the foreseeable future. Rents here in Colorado Springs are at an all-time high and it can also be a challenge to find a rental with so much demand. Real estate can be a great step in building wealth. People who own real estate have a higher rate of saving by the time they retire than people who rent.  At minimum, you have a roof over your head and you aren’t at the mercy of a landlord deciding to increase rental rates or sell their property. Keep in mind that you can refinance when interest rates inevitably go down again. Just don’t count on this if you’re not financially ready to afford the terms of your loan *now*.

Questions? Our team is always here to help. We can work with you to help you strategize about what works best for your personal real estate goals. Every situation is different, and it’s vital to have an experienced real estate professional on your team. Give us a call (719-219-9739) or email susanna@co-regroup.com.

Click here to download your free home buyer guide

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