Looking over your projected mortgage payments and starting to feel anxious? There’s still time to recalculate what you can afford and how to adjust your mortgage payment to make it manageable on an ongoing monthly basis. Better to do it now before you get locked in!
Extend Your Loan Term
The fastest way to reduce a monthly payment is simply to spread your loan out over a longer loan term, but this has the pitfall of having to pay more interest over the life of your loan. This can mean tens of thousands of dollars just in extra interest, and waiting many more years before you build any decent equity in your home.
Buying down your interest rate
If you can afford to shell out a little extra on the front half of your loan, you can drop your interest rate and with it your monthly payment.
A rate buydown is also called buying discount points. You’ll put up an extra 1% of your total loan amount, and get a quarter point in interest knocked off of your interest rate.
This can make a big difference in how much you pay over the life of your loan, assuming you don’t try to sell or refinance before you earn back the discount point buydown.
For example, suppose you qualify for a 20-year loan on a $220,000 home. You put down $20,000, and get a 4.5% interest rate on the $200,000. Your monthly mortgage payment is $1,265, and you pay a total of $303,672 by the end of the loan term.
Suppose you buy four discount points at $2,000 each. For $8,000 you can lower your interest rate by a full point, to 3.5%. Your monthly mortgage payment is now $1,160, a reduction of $105 per month, and you pay a total of $278,381, saving $25,000 over the loan term. A pretty good deal!
If you’re expecting a promotion or raise to come in the next year or so, you can also arrange a temporary buydown. This involves negotiating a smaller lump sum paid to the lender, who gives you a lower interest rate for the first few years of your mortgage only.
Boost your Down Payment
Remember that extra $8,000 you can use for a buydown? Suppose you put it towards your down payment. This actually iusn’t quite as food a deal as the rate buydown. You will be able to drop your monthly mortgage payment to $1,215, and you’ll pay $291,525 over the life of the loan. This is still a savings, but only half what you’d get if you opted to lower your interest rate instead!
Get Your Lender to Pay Your Private Mortgage Insurance (PMI)
You may be able to get your lender to pay a one-time upfront mortgage insurance premium to the PMI Company. This one-time payment means you won’t have to pay monthly mortgage insurance.
Of course, the lender will probably ask in return that you pay a higher interest rate. So even if you are “saving” $200 a month in PMI payments, you’ll drastically overpay on interest over the life of your mortgage. If you plan on selling or refinancing in a few years, this may not be as big an issue.
Look closely at all of the possible ways to lower your monthly payment, and talk to your Loan Officer before making a final decision.
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