In a previous blog we broke down all the components of your monthly mortgage payment and talked about ways you can save on the cost. Here, we discuss more ways to save on your monthly payment.

More Ways You Can Save Money on Your Monthly Mortgage

Mortgage Insurance

What is private mortgage insurance? Put simply, private mortgage insurance (PMI) is a policy that protects the lender should you default on your loan. You pay the cost for the policy wrapped up in your monthly mortgage payment. A lender will require a mortgage insurance policy when you put less than 20% down on a conventional loan. If you are obtaining an FHA loan, this payment is sometimes called a mortgage insurance premium (MIP), and you are required to pay it regardless of how much you put down.

You can avoid PMI with a conventional loan by putting 20% or more down on the purchase price of your home. This will save you from the added cost to your monthly payment. If you are unable to put that much down, know that PMI is temporary. Once you’ve paid 20% of your loan off, you can request the PMI be removed. A lender is required to remove it once your equity reaches 22% of the purchase value, but it’s always a good idea to keep an eye on it just in case they need a reminder.

When it comes an FHA loan and MIP, there are two scenarios. If you put less than 10% down, the MIP will be in place for the life of the loan. The only way to remove it is to refinance into a different loan type, such as a conventional loan. If you put 10% or more down, the MIP is dropped after 11 years. You can refinance into another loan type before the 11 years passes to reduce the number of years you spend paying MIP. Either way, most people end up refinancing to avoid further premium payments.

Refinancing

Speaking of refinancing, make sure you understand the costs to refinance and the new interest rate you will have. When you refinance, you are trading in your old loan for a new loan. The goal is to capture a better interest rate and terms than your current loan. You do not have to stick with your current lender to refinance. Refinancing can lower your payments but do so only if the cost to refinance makes sense. Your income, debt, and credit score are all considered in calculating a refinance. If there have been significant changes to your financial status, this can affect the closing costs and interest rate for the new loan. Be sure the benefits outweigh the cost before refinancing.

Recast Your Loan

Instead of refinancing, you can recast (or re-amortize) your loan. This option is typically only available for conventional loans (sorry FHA, VA, and USDA loan holders) and not all lenders offer it. Recasting a loan involves putting down a large lump-sum of money toward the principle. The lender then recalculates monthly payments based on the new principal balance. You keep the same interest rate and loan term, but your monthly payment will go down because you now owe less money on your loan.

This is an especially helpful option when you buy a new home before your old home sells. Once your old property is sold, you can use your proceeds to recast your loan on the new property and lower your monthly payment. Each lender is different, so make sure you understand the requirements of recasting your loan with your current lender.

Assumable Loan

When shopping for a new home, consider an assumable mortgage with a lower interest rate. FHA and VA loans (and some conventional loans) are assumable, meaning a buyer can take over a seller’s existing mortgage balance. To assume a loan, you need to qualify for the seller’s existing loan. Additionally, you’ll need to pay the seller their equity at closing in place of a down payment. For instance, if the purchase price is $400,000 and the seller owes $350,000 you will need to bring $50,000 to closing. This is called a gap payment.

Some lenders offer secondary loans to bridge this gap payment, but they may cap how much of the gap they will loan. If getting a secondary loan, you will need to qualify for both the assumable loan and the secondary loan. Make sure you understand the terms and repayment of a secondary loan before going this route.

If you have the cash to pay the gap and qualify for the existing mortgage, then you can take over their monthly payments from where they left off in the life of their loan. If the seller had a 30-year mortgage and paid five years into the loan, your assumed loan will only take 25 years to pay off. You keep the interest rate, have a shorter loan term, gain instant equity, and closing costs are less to boot.

You do not have to be a veteran or active military to assume a VA loan. However, some VA sellers may need a VA buyer to substitute their VA eligibility for an assumption. Anyone can assume an FHA loan if they qualify. Assuming a loan can save you thousands of dollars in both the short and long term of a home purchase.

Wondering Which Is Right for You?

Reach out to learn more about refinancing, recasting, and assumptions. We can put you in touch with trusted lenders who are knowledgeable about these options. Live Dream Colorado is well versed in assumptions and can help you find the right home for the right price. When You Buy or Sell with Us, the Power Is in Your Hands.