How Can I Lower My Mortgage without refinancing

How Can I Lower My Mortgage Without Refinancing?

I love the first part of the month. That would be the part of the month when rent is due. More specifically, I love the process of going to the mailbox and opening the envelopes with rent checks. Who doesn’t like making money with such little effort?

I remember when I was first getting interested in real estate. I was reading as many books about investing that I could get my hands on. The books that I enjoyed the most were how-to books on investing in real estate. I found that the authors of the books I enjoyed most were the ones that were always mentioning real estate — even if the books themselves focused on other financial topics. 

I purchased my first property as I was turning 21. I lived there for a few years before moving out and turning it into my first rental property. As soon as the value increased and I began earning a steady monthly cash flow, I was hooked. I decided then that real estate would be the tool I was going to use to amass wealth. 

There are many reasons why I love this business, but if I had to pick just one, it’s the ability to give myself a raise every year. With a little effort and creativity, you can increase your monthly cash flow without increasing your effort. I go through this process at least once a year when I raise rents, but I also look for other ways to make money—for example, saving money by lowering the monthly payments on your loan. The most obvious way to do this is through a refinance, which is a good option when rates are low. However, there are other ways to lower your payments without a refinance. The following are a few alternatives to refinancing your mortgage:

1. Ask for a Loan Modification

Depending on the lender, it is possible to change a loan’s terms without a full-blown refinance. Doing so is called a loan modification. A loan modification involves changing or modifying some part of the loan. Not only can you lower your monthly loan payments, but you can also save thousands of dollars in fees and a ton of time compared to if you were to refinance. 

The loan modification process can vary significantly from lender to lender. The first thing you should do is to call your lender and ask them what options are available. If you need to reduce payments to stay current, you will have a better chance of success, but even if you don’t technically need a modification, it could still be worth asking for. There are generally two ways that you can modify to help lower your monthly payment. 

Stretch Out Loan Term

If you can push your loan term out, it would extend your payback period and decrease your monthly payment. Going this route can help lower your payment even more than lowering an interest rate would. The option to stretch out your loan term is more common with bank loans than conventional loans, and it’s generally offered when you need the help. If you are having trouble keeping up with payments, the lender will often be more willing to change the terms so that you don’t default on your loan.   

Switch To An Adjustable Rate 

Adjustable-rate loans are almost always lower than fixed-rate loans. The reason for this is that the lender shifts the risk to the borrower. Let’s say you have a fixed-rate loan, and interest rates start to rise. In that case, you will not want to pay off your loan, and the lender will not be able to reloan that money at a higher rate. The lender would be stuck with a low-rate loan. This situation is known as an “interest rate risk.” On the other hand, if you have an adjustable-rate loan and interest rates rise, your rate would increase as well. As a result, the lender gets the higher rate and eliminates the interest rate risk. 

I would not recommend switching to an adjustable rate if you plan to keep the property for a while because you won’t want to take on that interest rate risk. However, it’s still an option if you’re looking for a short-term reduction in your payment. 

2. Cancel PMI (Private Mortgage Insurance)

Depending on lender guidelines, you may be required to pay a monthly PMI you take out the loan. PMI protects the lender in case you default on your loan. If you default, the insurance company steps in and helps the lender reduce or avoid a loss. Loans like FHA and VA come with mortgage insurance as standard. Conventional loans often come with insurance when you are over a specific loan-to-value(LTV). The LTV refers to the total loan amount as a ratio of the property value.

For rental homes, it is common to see PMI on loans with LTV ratios of more than 80%. Using this LTV ratio, if you had a house worth $100,000 and a loan of more than $80,000, you would be required to have mortgage insurance. Mortgage insurance typically consists of an upfront fee paid at closing along with a monthly premium. As such, your PMI will increase your overall monthly payments.  

However, did you know you can ask your lender to remove the PMI insurance premium once you hit the required LTV? If you think your home has gone up in value or you have reduced your loan balance with your monthly payments, you can call your lender and ask them to remove the insurance premium.  

First, they will check to make sure that you even can remove your PMI, and then they will share the requirement to accomplish it. Sometimes it is as simple as approving your request and removing it, and sometimes they will want to document the value increase with an appraisal. Either way, if you are below 80% LTV on your rental homes with PMI, you can probably get that removed. 

3. Appeal To Lower Your Property Taxes 

Most loans come with an escrow account. Lenders use an escrow account to hold your money to pay your taxes and insurance when those become due. By paying a little each month, the lender can be sure you have the money available in escrow to make those payments.

If you can lower your annual tax bill, your monthly mortgage payment will go down. Reducing your tax bill can be a tricky process, but I have had quite a bit of success with doing so over the years. The County Assessor values real estate and uses that value to tax the owner. The higher the assessed value is, the higher the taxes will be. However, these valuations can be incorrect sometimes, resulting in owners having to pay more than their fair share. 

If you feel like your property’s tax-assessed value is too high, you can challenge that value. If you’re successful, your tax bill will go down. Each county will have a process to challenge assessed values, so you will want to either check out their websites or call the assessor’s office. You will have to prove your case, which means you’ll need strong evidence in the form of recently sold homes (comps) that demonstrate a lower value. There are also companies out there that will do this work for you on a contingent fee. I have used companies like this many times. They battle it out with the county on your behalf, and you will only pay them if they are successful. The fee is usually based on the amount of money they save you. It’s a no-lose situation for you if you don’t want the headache or don’t have the time to challenge it yourself.   

4. Seek To Have Your Escrow Payment Recalculated

Although rare, you could be getting overcharged on your escrows. Lenders are required to assess your escrow once a year, and if you are overpaying, they will refund the money or lower your monthly payment. If you think your escrow account is sufficient to pay your taxes and insurance, you can ask them to reassess the monthly need, and hopefully, they will reduce that for you.

5. Look For A More Affordable Homeowner’s Insurance Policy

Loans with an escrow account consist of four parts to each monthly payment, including principal, interest, taxes, and insurance (PITI). We talked about the overall accounting of the escrow account and the tax portion of your payment. Insurance is no different. If you can lower your insurance costs, you can lower your monthly mortgage payment. The easiest way to reduce your insurance is to call around to look for a cheaper option. That is not the only way, though. 

Another option is to change the policy to decrease the rates. A higher deductible can lower your monthly expense, as can lowering your coverage. Just be sure to proceed with caution. It’s typically not a good idea to reduce insurance coverage. However, I carry high deductibles on all my policies. Because I have a portfolio of properties, the savings per month for the higher deductible policies are much higher. As long as I keep enough cash in reserves to meet my deductible, I should be ok if there is damage to the property. After I have the money set aside, the monthly savings help to increase my profits. My general advice is to play with the deductible only if you can afford to, shop for better insurance rates, and then speak to your agent about lowering your coverage. 

6. Recast Your Loan

A mortgage recast is when you re-amortize your loan. Essentially, it lets you start with a new amortization schedule based on the amount of time left on your loan. It will require a sizeable principal payment for this to work. For example, if you have 25 years left on your loan and you make a large principal payment and don’t recast, you will shorten the time it takes to pay off the loan. Of course, in this case, your monthly payment would remain the same. If you recast your loan, your loan term would remain unchanged, but your monthly payment would go down. 

Many adjustable-rate loans will automatically recast if you make a large principal payment, but the fixed-rate loans will not. You will need to call the lender to find out what the process is to recast the loan. Recasting could be an excellent option for you if you come across a large sum of money.

Why Mortgage Rates Matter

If you can lower your interest rate, you will reduce the interest you will owe, which will reduce your monthly payments. In many cases, the loan term is more important than the interest rate, but a lower rate is always better when terms are the same. However, this is not ordinarily possible without a refinance, especially if you want a fixed-rate loan.   

Any one of these options can help lower your monthly payment, and a combination of a few is always possible. Refinancing is great if it improves your situation and is possible, but it can be a time-consuming and expensive process. When refinancing is not an option, consider some of these alternatives to reduce your monthly payment and give yourself a raise.