Lowering your mortgage payment is one way to reduce overall spending. However, you owe it to yourself to spend time investigating the various methods available, to ensure the greatest benefit and avoid wasted time.
The following basic methods are available to reduce mortgage payments;
1) – Obtain lower interest rate, generally by refinancing the mortgage loan
2) – Obtain modification of loan payments, via negotiation with the lender
3) – Obtain reduction of property taxes
You can also eliminate current mortgage payments by selling the house, if feasible, and moving to a new residence with lower payments.
Refinancing
Refinancing the mortgage may be the most direct way to lower payments. However, this method is typically available only if you; (1) Are not way behind on payments, and (2) Can handle the up-front “closing” costs, which may include “points” charged by the lender.
You will not obtain any overall net benefit unless you remain in the house long enough so that the reduced (after tax) payments will offset closing costs. If closing costs are added to the loan amount, you will pay interest on the closing costs.
If you itemize deductions on your Federal tax return, the mortgage interest deduction will be reduced. Net benefit (cost reduction) is less than the difference in mortgage payments.
Amount of payment reduction depends on the reduction of interest rate. Using a mortgage calculator program, found on several web sites, you can easily determine the change in payments. Lending Tree provides one such calculator (Mortgage Calculator). For figuring the change in monthly loan payment (only), input zero for property taxes and insurance.
For a 30-year loan, with reduction of interest rate from 6.50 to 5.00 percent , monthly payment is reduced by $95.24 for each $100,000 of loan amount. However, for 25% Federal tax bracket, net after-tax benefit is $71.43 per month. For closing costs that are 1-percent of the loan amount, ($1,000 for this example), it will take 14 months to break even.
Loan Modification
As housing prices fell dramatically after 2007, many homeowners who bought after 2003 are faced with the fact that they now owe more (on the mortgage) than the current market value of the property. This unfortunate situation results in major problems with refinancing and even with trying to sell the house.
Loan modification has therefore become much more important than in the past.
In general, the goal of loan modification is to reduce monthly payments so that the owner can remain in the house while making at least some payment. Lenders go along to avoid the hassle of foreclosure.
One modification is to allow the owner to pay interest only. This means that the outstanding balance on the mortgage loan (“principal”) is not reduced at all. Essentially the owner is paying rent. At some time in the future, principal payments will have to be made again, which will increase mortgage payments. This method is only reasonable if there is good expectation that the owner will increase income in the future, or that the home value will increase steadily again. Also, this method is not useful for relatively new owners who have not been paying much principal anyway.
Another approach is “negative amortization”, which allows for greater reduction of payments by paying less than the required interest on the outstanding balance. Unpaid interest is then added to the outstanding balance, resulting in an increased loan amount that will eventually have to be paid.
The more “radical” approach, typically resisted strenuously by lenders, is to reduce the principal amount of the loan, allowing for even greater reduction of mortgage payments. Essentially, this means that the lender will give back or “forgive” part of the outstanding balance. For example, if the original mortgage was $300,000, and the outstanding balance is $260,000, a deal might be negotiated so that the outstanding balance is reduced to $200,000 to reflect large reduction in market value of the property. Of course, this means that the lender would be agreeing to give back $60,000 (plus future interest on that amount) to the homeowner.
If the term of the mortgage is less than 30 years, it should be relatively easy to have the term changed to 30 years, which will reduce the standard payment (principal + interest).
The Federal government (HUD) now has a program (“Making Home Affordable” ) that aims to assist homeowners to obtain reduced mortgage payments. However, this program is most likey only useful if you are current on the mortgage.
Communication with the lender should be attempted if you have been failing to make mortgage payments. Especially now, lenders are tending to be receptive to proposals for loan modification. However, you may need leverage to be successful.
For the vast majority of homeowners who need payment reduction, loan modifications may only be obtained if you have not been making mortgage payments. Essentially, such “strategy”, which is risky, will give you some leverage with the lender, who must then make the choice of forging through with the lengthy and costly foreclosure process, or working out a deal with the homeowner to reduce payments.
If you can withstand the annoyance of being harassed by the lender (phone calls, letters), you may be able to negotiate very favorable terms of a loan modification that will significantly reduce payments. However, this approach can backfire if the lender decides to barge ahead with foreclosure. This is why you must talk to the lender and follow-up with letters (or at least emails). Consultation with a qualified attorney should be considered.
Although somewhat radical in their politics, the Neighborhood Assistance Corporation of American (NACA) can provide worthwhile assistance for homeowners facing foreclosure.
Other sources of information are available online, such as ForeclosureFish.com
Modification of an FHA mortgage may be possible through the FHA (Federal Housing Administration).
During 2010, major problems with irregularities of mortgage documents were highlighted in the news. Some homeowners have been able to avoid making any mortgage payments, at least for a period of time. Essentially, due to financial manipulations of the original mortgage loan, the companies attempting foreclosure have been unable to prove that they actually own the mortgage loan. This presents very favorable conditions for the homeowner to seek a negotiated loan modification. However, competent legal representation is almost certainly necessary.
Reduction or elimination of associated fees, such as private mortgage insurance, might be feasible as part of loan modification.
Property Taxes
Many homeowners must also pay property taxes to the local government, often along with the mortgage payment. Some homeowners may not be aware that their mortgage payment includes property taxes, which can be quite significant in some areas such as the northeastern US states.
In general, property taxes are based on “assessed value”, not market value. Property assessments are most often made as part of a reassessment for the entire area governed by the taxing authority (city, county). Some properties may also be assessed separately when improvements are made.
It is most important to understand that, for taxing purposes, assessed values are intended and used only to assign relative values for each property. Assessed value can therefore be thought of as “points” in a game. Those properties that have higher “points” will be charged more property taxes than those properties having lower “points”.
Market value most definitely is used to determine the assessed value. However, only the relative value is important to determine property taxes. If the market value of every property within a taxing jurisdiction were to somehow change by the same percentage (over a period of time), then the relative value (“points”) for each property should remain the same.
However, if you can show (with proper documentation) that the relative value of your property has decreased much more than the value of other properties within the same taxing jurisdiction, you may be able to obtain a reduction in property taxes.
In general, the taxing authority should provide a standard procedure that allows you to appeal the assessed value. However, you will have to either spend a fair amount of time making such appeal yourself, or you will have to spend money to obtain competent (that is a key word!) legal advice. Also, be prepared for a long process and for resistance by the taxing authority.
Selling The House
If all else fails, and if the lender is not foreclosing, you might consider selling the house to eliminate the mortgage payment. Of course you will then have to find another (less costly) residence and you will face moving charges.
If the market value of the property has fallen to a value less than the amount you owe on the mortgage, selling the property will generally be a problem. You will have to get the lender to approve a “short sale”. Consultation with a qualified attorney should be considered for a proposed short sale.