Tricks to Lower Your Mortgage Payment: Is It Possible?

I often get asked if there are any tricks to lower your mortgage payment, and the short answer is NO. However, there are a few ways to decrease your monthly mortgage payment, but those options will require a little legwork on the side of the borrower. With the economy in the state that it is currently in, I’m going to focus on 2 main ways that mortgage payments can be reduced.

Refinance Your Primary Mortgage

Flickr Photo: Uploaded on October 20, 2008 by woodleywonderworks Refinancing your mortgage will typically be the best option, as it can save you hundreds of dollars per month if you’re refinancing from a high interest rate to a lower rate. Let’s look at an example, lets figure that I took out a $250,000 mortgage loan 5 years ago with an interest rate of 7.25%. At this loan amount and this interest rate, my monthly payment will have been approximately $1,705.00 per month. As of the time of this post, I’ve seen interest rates for 30 year mortgages as low as 5.75% – the interest rate will depend on your lender, your credit score, payment history, etc. so you’ll have to talk to a mortgage broker prior to getting a firm rate quote, but for the interest of our example, we’re going to figure that we can get a loan at a rate of 5.75%. For simplicity sake, lets compare a $250,000 loan at 5.75%. At this interest rate, our monthly mortgage payment will be approximately $1,459.00. This is a savings of $259 per month. A couple things to remember are that:

In this example, we figured that we’ve had our original loan for 5 years. If that were the case, we wouldn’t still need a $250,000 loan, we’d actually only need a loan for about $235,950 (let’s figure $236,000 for simplicity). Plugging that amount into a payment calculator will yield a monthly payment of $1,377.00 per month, yeilding a savings of $358 per month.

You’ll have to take into account loan processing fees. Typically you’ll be paying processing fees, points, etc. which could end up being a couple thousand dollars. When I refinanced, I wrote a check for all of these fees ($2,900 in my case), however I believe that you can have these fees rolled into the cost of your new payment.

Trying to Refinance to a Lower Interest Rate: My Refinance Was Denied

With interest rates in the high 4-percents to low 5-percents, now is the perfect time to refinance, especially for those of you who may currently have an adjustable rate loan. If you’re looking to get out of your adjustable rate loan, there is no better time than the present to get yourself into a fixed loan. However, the biggest problem with trying to refinance right now is that many homes have dropped in value, so the homeowners equity may not be what it needs to in order to refinance.

Take my case for instance. When I bought my condo 5 years ago, I paid $290K for it, and at the peak of the market, its value approached $475K, but right now, it’s value is only appraising at about $250K. This sucks, because in order to refinance, I can only borrow 80% of my homes equity, or $200K if my home appraised at $250K exactly. The banks don’t take into consideration that I’ve been on time with ever mortgage payment over the last 5 years, and that I’ve even made extra principal payments in some of those years in order to accelerate my mortgage.

If you have enough equity in your house, now is the time to refinance, but if your home value has dropped, as most homes in the Southern California area have over the past year, you just may find yourself in a situation similar to mine – having your home refinance denied. It’s a very unfortunate situation when someone like myself who takes pride in having great credit has a refinance declined because of the current state of the market.

I’m currently looking at a couple other options that will help me get refinanced, and I’ll keep you all posted if I find a way to lower my interest rate.