Over half of Americans are living paycheck to paycheck, and many are looking for ways to cut costs as the price of necessities rises. For those who own a home, lowering mortgage payments could help.
Refinancing at a lower rate is one strategy to do this, but as rates linger in the mid-6% range, that may not be worth the costs.
Luckily, there are other — and often cheaper — ways to lower housing costs that don't involve a full-scale refinance. Below, CNBC Select shows you six ways to reduce your monthly housing costs by adjusting your mortgage.
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1. Look for cheaper home insurance
If you have a mortgage, you're usually required to have a homeowners insurance policy as well. This can cost thousands of dollars each year.
The best way to make sure you have the best deal, is to shop around for a new homeowners insurance policy every time you have a chance to renew. Our insurance reporter recommends doing this every year when your policy renews to make sure you're getting the best deal.
2. Eliminate mortgage insurance
In order to save each month, you may have to sometimes spend more upfront.
If you have a conventional mortgage and made a down payment of less than 20%, you're probably paying for private mortgage insurance (PMI), which protects your lender if you default on the loan. PMI is usually rolled into your payment to your mortgage provider and it's typically between 0.5% and 5% of the annual total loan amount. This can add hundreds of dollars onto your housing bill each month.
But, once you hit 20% in equity, you can request that the mortgage insurance be removed. Most conventional mortgage lenders will do so. Prioritizing getting to that threshold could help you lower costs in the long run.
Borrowers with a government-backed Federal Housing Administration loan pay mortgage insurance premiums (MIP), which operate slightly differently from PMI. If you put less than 10% down, you'll have to pay MIP for the life of the loan — regardless of how much equity you accrue. However, if you put at least 10% down, you can cancel MIP after 11 years. You can also convert your FHA loan into a conventional mortgage and build at least 20% equity before canceling PMI.
3. Consider recasting your loan
Recasting your mortgage involves making a large lump-sum payment toward your balance, after which your lender re-amortizes the loan. With a smaller balance, you'll owe less in interest and pay less each month.
Unlike a refinance, you won't have to pay closings costs when you recast your loan, but your lender may charge an administrative fee, which is usually a few hundred dollars.
Rules for recasting vary — and not all lenders offer the service — but you'll need to have enough equity in your home and a large enough payment to be approved.
4. Ask about a mortgage modification
If you can't afford your mortgage payments due to a major life event, like losing your job, you may qualify for a loan modification, which changes the terms of your loan to help avoid foreclosure.The lender may lower your interest rate, extend the repayment terms or even reduce the principal balance.
You will need to provide documentation that verifies your financial situation, and you may also be required to complete a trial payment plan before you're fully approved to show you can follow the plan consistently.
A loan modification permanently adjusts your payments. If you're only looking for temporary relief, forbearance can reduce or pause your payments temporarily. Both options affect your credit, however, and should only be considered if you're in a serious financial crisis and are unable to afford your mortgage.
5. Appeal property taxes
Many homeowners with mortgages roll their property taxes, homeowners insurance and monthly mortgage into one payment that goes into an escrow account. That way, the lender knows the property is fully insured and not under threat of a tax lien.
If you're able to demonstrate that your local government has overassessed your home, you may be able to appeal and lower your property tax rate.
6. Refinance your mortgage
If none of these options work, you can try to refinance at a lower rate.
A rate-and-term refinance allows you to replace your existing mortgage with a new loan at a lower interest rate or a different timeline. Closing costs on a refinance mortgage can range from 2% to 6% of your total loan amount, so before committing, use a break-even calculator to determine how long it will take for the savings to offset the costs. Be sure to take into account how long you plan to stay in your home.
Try to go with lenders known for lower rates. We like Better Mortgage and FourLeaf Credit Union for that reason. Both lenders consistently offer lower-than-average rates and have nationwide availability.
Better Mortgage
Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
Types of loans
Conventional loan, FHA loan, Jumbo loan and adjustable-rate mortgage (ARM)
Terms
10–30 years
Credit needed
620
Minimum down payment
3.5% if moving forward with an FHA loan
Terms apply.
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FAQs
Does paying closing costs lower your mortgage payment?
Avoiding closing costs typically involves rolling those fees into your mortgage, which means you'll pay interest on them over the life of your loan. Paying the closing costs upfront can save you money in the long run. Many lenders also offer closing cost grants to borrowers who meet specific requirements.
Can you defer or skip a mortgage payment?
If you have a serious life change, like an illness or job loss, you can reach out to your lender about a loan modification or forbearance, which will allow you to alter or pause your loan payments for a set period of time. Repeatedly skipping mortgage payments could lead to foreclosure and the loss of your home.
Will canceling PMI lower my mortgage payment?
Private mortgage insurance isn't part of your mortgage payment, but it is typically paid to your lender at the same time. Canceling PMI can lower your monthly bill by hundreds of dollars. You have the right to request the lender end PMI when your mortgage principal is scheduled to fall to 80% of the home's original value (i.e., you've earned 20% equity in your home).
Why trust CNBC Select?
At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every mortgage product review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of mortgage products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics. See our methodology for more information on how we choose the best mortgage products.
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