Refinancing your home loan can potentially lower your monthly mortgage payment. However, refinancing also involves closing costs and fees that often make the process not worth it – especially if you don’t plan to stay in the home for very long.
So what options do you have if you want to reduce your mortgage payment without going through the hassle and expense of refinancing? There are actually several effective strategies you can employ right from your current loan.
In this post, we’ll explore the 5 best ways to lower your mortgage payment without refinancing. We’ll provide real examples, key things to know about each option, and tips for determining if a particular strategy makes sense for your situation.
So let’s get started!
1. Request Principal Reduction from Your Lender
One way to instantly lower your mortgage payment is by asking your lender for a principal reduction. A principal reduction involves the lender essentially “forgiving” a portion of the remaining balance on your loan.
This immediately decreases the total amount you owe, in turn lowering your monthly payment. While lenders are under no obligation to grant a principal reduction, it doesn’t hurt to request one – especially if you’ve been a long-time customer in good standing.
The key factors lenders consider include:
- Your payment history – Have you always paid on time with no late payments?
- Income changes – Have you experienced a job loss, pay cut, or other financial hardship recently through no fault of your own?
- Home value – Has your property dropped significantly in value since taking out the loan?
Some data points that may help your case include providing documentation of income reductions, unemployment status, rising expenses like healthcare costs, etc. Request the reduction in writing and emphasize your willingness to continue prompt payments going forward.
There’s a decent chance smaller, community-based lenders might be more willing to negotiate than big banks. Be polite yet persuasive in your communication. You’d be surprised – principal reductions aren’t uncommon in certain circumstances.
2. Make Bi-Weekly Payments Instead of Monthly
Switching to bi-weekly half-payments is a simple tactic that can lower your mortgage 25-50% faster compared to standard monthly payments. How? By making the equivalent of an extra payment each year.
Here’s an example:
- Monthly payment: $1,000
- Bi-weekly payment: $1,000 / 2 = $500
- Payments per year: 26 (every other week) vs. 12 monthly
- Extra payment credit each year: Roughly 1/2 payment
Over the life of a 30-year loan, the extra annual payments knock several years off the timeline. This shaves thousands off your total interest costs. Plus, each bi-weekly payment is slightly lower than the full monthly amount due to how the payment is applied.
To set this up, simply call your lender and request changing your payment frequency. Most are accommodating as long as you maintain auto-pay. It’s a small change that makes a big impact over the long term.
3. Make Additional Principal-Only Payments
Another straightforward tactic is making additional principal-only payments above and beyond your regular monthly amount due. Here are the key details:
- Principal-only payments are applied 100% toward reducing your loan’s principal balance, not future interest.
- This lowers your outstanding balance faster, decreasing the total amount of interest paid over time.
- Consider setting up recurring monthly auto-pay for an extra $25, $50, or $100+ toward principal if your budget allows.
- Or make an annual lump sum payment from tax refunds, bonuses, or other windfalls specifically for principal.
- Any extra amount, no matter how small, cuts down on how long it takes to become mortgage free.
Use an online mortgage calculator to model different additional payment scenarios and see the potential savings. With discipline, you can shave years off a 30-year loan and bank thousands in avoided interest costs. Just be sure not to jeopardize emergency funds in the process.
4. Recast Your Loan to Re-Amnortize at a Lower Balance
A recast involves recalculating your loan at its current lower balance rather than original amount. This lowers your monthly payment immediately.
It works like this:
- You’ve been making on-time payments for a number of years, chipping away at the principal balance.
- When the remaining balance drops to a certain threshold, typically 70-80% of the original, you can ask to recast.
- Your lender will then re-amortize the loan using the current lower balance over the number of years remaining.
- Poof – your payment drops substantially since less principal needs to be repaid each month.
Recasting may require a one-time fee of 1-2% of the outstanding balance. Still, the payment reduction often outpaces the fee within a year or two of lower installments. Check your loan documents or call and inquire about recasting options.
5. Refinance into a Shorter Loan Term
While refinancing typically means redoing your entire loan, there is a sneaky way to lower payments without much cost: refinance into a slightly shorter term.
For example, if you currently have a 30-year fixed but excellent credit, ask your lender about a refinance into a 25- or even 20-year term.
Why this works is that; It has shorter terms reduce the number of months over which your balance is amortized. Less time means higher monthly payments since the same loan amount must be paid off sooner. However, the reduced time saves considerably on total interest costs over the life of the loan.
Refinancing only a few years off your current term often qualifies you for the best refi rates. And you avoid high closing fees since it’s essentially a streamlined process rather than full refinance. Just make sure the slightly higher payment fits your long-term budget.
Wrapping Up
Every homeowner’s financial situation is different. Carefully analyzing your goals and constraints will help determine the best payment reduction approach. Some additional factors to weigh include:
- How long do you plan to stay in the home? Short-term strategies may not be worthwhile if planning to sell within a few years.
- Credit score and debt-to-income ratios – May limit refinance or recast options if these have declined from when you originally took out the loan.
- Tolerance for higher payments – While options shorten loan timelines and interest paid overall, some do mean higher monthly bills now.
- Income stability – Principal reductions, recasts and short refis may need recent pay stubs to verify your ability to handle a new payment amount.
Consider testing multiple scenarios using a mortgage calculator rather than committing to just one tactic. Combining approaches like bi-weekly payments plus annual lump sums for principal can magnify your savings.
Don’t forget to document all payment reductions for tax purposes as well. The interest portion of each payment becomes deductible once total mortgage interest and property taxes for the year exceed certain income thresholds.