How to lower your mortgage payment: 8 proven strategies

If you are currently paying for your home via mortgage financing, you’re probably wondering: How can I lower my mortgage payment? The answers to this question are important and valuable, especially if your interest rate is high and you are struggling to afford the monthly charge.

Should you refinance your mortgage? Should you recast your loan? When can you cancel your PMI? Read on to learn how to reduce monthly mortgage payments and effective methods you can pursue.

First things first: Understand your current mortgage

Before investigating options to lower mortgage payments, it’s important to understand where your money goes when you pay your monthly mortgage payment. Your monthly mortgage payment is made up of four main components, often referred to as PITI, which stands for principal, interest, taxes, and insurance. Each part plays a key role in your homeownership costs and is calculated based on your loan terms, local tax rates, insurance requirements, and your financial profile. Let’s break down each of these four components:

Principal

This is the amount of money you borrow to purchase your home.

“Each month, a portion of your payment goes toward reducing this principal balance. In the early years of your loan, less of your payment applies to principal and more goes toward interest,” explains Anthony Sharp, a Realtor with Sharp Realty Group.

Interest

This is the cost you pay to borrow money from your lender. It’s based on your loan’s interest rate and outstanding principal owed. Your rate is calculated based on factors like your credit score, the type of loan chosen, and market conditions.

“Your interest amount is front-loaded in most loan terms, which means your early payments will consist of a heavily interest-weighted portion,” notes Dennis Shirshikov, a professor of finance and economics at City University of New York/Queens College.

Taxes

Your lender likely collects property taxes as part of your monthly mortgage payment, holds these funds in an escrow account, and pays these taxes on your behalf when they are due. This amount is based on your property’s assessed value and local tax rates, which can differ significantly depending on where you live.

Insurance

There are two different kinds of insurance your lender may collect with your mortgage payments: homeowners insurance, and, if you are required to pay it, private mortgage insurance (PMI).

“Homeowners insurance protects your property and belongings from damage or loss due to fire, theft, or natural disasters,” Sharp says. “PMI is typically required if you put down less than 20%. It protects the lender in case you default on the loan. Both premiums are escrowed and paid by the lender.”

8 ways to lower your mortgage payment

Now that you better understand what your mortgage payments consist of, it’s time to consider proven strategies for paying less each month. Consider these options:

Refinance your mortgage

The most common and well-known way to reduce mortgage payments is to refinance your loan. This entails applying for an entirely new mortgage loan, paying closing costs, and using the proceeds to pay down your old mortgage. Many borrowers with an adjustable-rate mortgage, for instance, often choose to refinance to a fixed-rate mortgage loan for more predictable and often lower payments. Others, including those with a conventional loan, opt to liquidate equity at closing via a cash-out refinance loan.

“This method typically only makes sense if it leads to a lower interest rate than it was before,” suggests Filip Telibasa, a Certified Financial Planner with Benzina Wealth, LLC. “If you are determined to proceed with a refinance, you should review your breakeven point. This determines how long it will take for you to recoup your closing costs via the new lower payments. You need to ask yourself: Do you still plan to be in the house by that time?”

Recast your loan

Recasting your loan is a lesser-known and often better option to reduce your monthly payment. A mortgage recast involves asking your lender to reassess your principal balance after making a larger, one-time payment applied toward your principal, without paying any closing costs.

“A mortgage recast can reduce your monthly payment without the expense or paperwork of a refinance. However, it’s only available with some types of lenders and loans – typically conventional loans,” adds Shirshikov.

Although recasting can reduce your payments, it’s smart to consider your interest rate and the opportunity cost.

“For example, if you already have a fairly low interest rate – say 6% or lower – you are generally better off holding onto your lump sum payment and investing it elsewhere since you can likely earn more interest than what you would be paying,” suggests Telibasa.

Cancel your PMI

If you are paying PMI because your down payment was less than 20%, the good news is that PMI can be canceled once you reach a 20% equity position. This can be done either through making continued mortgage payments over time or if your home appreciates in value (which requires an appraisal). Then, you can request to cancel PMI, or your lender will automatically cancel PMI.

“This may lower your payment by $100 to $300 or more a month, depending on your loan amount and insurance rate,” says Sharp.

Extend your loan term

Here’s a tweak on the refinancing strategy: Consider refinancing to a longer-term mortgage, such as resetting your existing 15-year loan to a new 30-year mortgage. This can significantly reduce your monthly payments, but you will pay much more total interest over the life of the new loan.

Loan modification or forbearance

If you are struggling to make your mortgage payments, contact your lender as soon as possible. They may offer a relief option like loan modification or forbearance, particularly if your financial hardship is temporary.

“Loan modification adjusts the terms of your mortgage, such as extending the term or lowering your interest rate, to reduce your monthly payment,” Sharp says. “Forbearance, meanwhile, allows you to pause or reduce payments for a set time, but you will need to repay the deferred amount later through a lump sum, repayment plan, or by adding it to the end of your loan. These options can provide critical breathing room during tough times, but they may come with terms and potential long-term impacts. So it’s essential to understand the details before committing to either choice.”

Appeal your property taxes

If your home was assessed higher than it should have been, consider appealing it yourself or with the help of an attorney. If you are successful, this can lower the amount your lender collects for property taxes.

Shop around for cheaper homeowners insurance

Get quotes from several different carriers and compare offers. You may be able to save hundreds of dollars a year if you carefully compare prices from several different insurers and you qualify for discounts.

Make extra payments

A roundabout way of lowering mortgage payments – at least down the road – is making accelerated payments toward your principal. This sounds counterintuitive, but it will pay off over the long run. This involves making accelerated payments toward your principal. Yes, it means paying more in a given month or year, but it will pay off your loan more quickly, which means you will pay less in total interest over the life of the loan.

“For example, paying biweekly as opposed to monthly allows you to align cash flow and make a few extra payments to your mortgage each year. This will allow you to pay off sooner,” continues Telibasa.

Factors to consider before lowering your mortgage payment

Prior to pulling the trigger on any of these tactics, it’s a good idea to ponder different factors that could complicate matters and to carefully weigh the pros and cons of each strategy.

Refinancing costs

“The costs to refinance a mortgage can be steep, often 2% to 5% of your loan amount, which can equate to several thousands of dollars,” cautions personal finance expert Andrew Lokenauth.

Always balance the closing costs with your potential monthly savings. For instance, if refinancing sets you back $6,000 in closing costs and you only save $100 a month, it would take five years to break even (more on this next).

Your break-even point

This is the time when your monthly savings from refinancing surpass the cost of refinancing. Simply divide your total refinance costs by your monthly savings to determine how long it will take to recoup the expense involved.

“Many people jump into a refinance without carefully considering how long they will stay in the home. If you plan to move in two years, refinancing probably isn’t worth it,” Lokenauth adds.

Your credit rating

Refinancing may not be worth it if your credit score is lower than desired. That’s because your refinance lender will likely charge a higher interest rate with stricter terms.

“If your credit is not where it should be, take the time to improve it and raise your credit score before taking action,” recommends Sharp.

FAQs

Can use skip a mortgage payment?

You are not allowed to skip a payment without credit consequences and lender penalties unless your lender offers a formal deferment or forbearance agreement. These options are usually available in cases of temporary financial hardship, such as a medical emergency or job loss. Skipped payments are either added to the end of your loan term or repaid in a lump sum or payment plan. Some lenders also offer payment deferrals under loan modification or workout programs, especially if you are coming out of forbearance. Before you plan to skip any payment, contact your lender to avoid penalties or damage to your credit.

Does paying closing costs lower a mortgage payment

If you were planning to roll your closing costs into your loan, paying your closing costs upfront and in full at closing is a better idea if you want to reduce your total principal and, thus, your monthly payments, at least by a small amount.

Conclusions

If you want to lower your mortgage payments, the key is to be informed and proactive and balance short-term relief with long-term financial impact.

“Evaluate your current financial goals, understand the terms of your mortgage, and work with a trusted lender or advisor to explore your best options,” advises Sharp. “Whether your goal is immediate relief or long-term savings, there are several methods to consider. Just be sure to run the numbers and understand the trade-offs involved.”

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