I was surprised the first time I saw our mortgage payment increase – after all, we had a fixed rate mortgage. And fixed rate mortgages should always have a fixed mortgage payment, right?
Well, they do. But we were also paying into escrow for our homeowners insurance and property taxes and after the first year there was a shortfall, so we had to pay an extra $40 or $50 each month to help make up for the escrow shortfall. We had enough room in our budget that it didn’t affect us too much. But not everyone has that kind of room in their budget. That experience got me thinking about how I could lower my mortgage payment, not only to help in times like these, but to pay it off more quickly.
How to Lower Your Mortgage Payment
If you pay your mortgage through escrow and it includes your mortgage, property taxes, and homeowners insurance, then those are the areas you want to look at to reduce your mortgage payments. Let’s take a look at them to see if any of them will work for you.
Refinance your mortgage. The most permanent solution, and often the biggest win, is to refinance your mortgage at a lower interest rate. Interest rates right now are at or near all time lows, making this a great time to refinance your mortgage. You will have better success refinancing your mortgage if you have 20% or more equity, and you will need a good credit score to refinance your mortgage. This is why having a high credit score is so important: reducing your interest rate by 1% can save you hundreds of dollars each month, and tens of thousands of dollars over the remainder of your mortgage. The good news is that having a mortgage can improve your credit score over time if you consistently make on time payments, making it easier to be approved for a refinance loan.
Challenge your property taxes. While I was researching the change in our mortgage payment I discovered our county had our property taxes listed incorrectly. They showed our house as having an extra bedroom and more square footage than it actually had. I challenged our property taxes and our home was reassessed, saving us several hundred dollars each year. Many counties only allow you to challenge your property taxes at certain times during the year, so be sure to look into the process.
Get new homeowners insurance quotes. Another way to slash your costs is to get quotes for a new homeowners insurance policy. You can lower your homeowners insurance rates by remaining with your current insurance provider and selecting a higher deductible, or you can shop around for lower homeowners insurance rates. Keep in mind that many insurance providers offer discounts for multiple policies, so you may be able to shop for other insurance policies at the same time and save even more money by bundling policies. Be sure to choose a deductible you can afford, otherwise saving a few bucks can cost you more than you bargained for.
Refinancing will save you the most money
Refinancing is the best option of these because it gives you immediate results (or as long as it takes to close on your new loan), and the results are typically larger and permanent if you get a fixed rate loan.
You may or may not receive immediate results by challenging your property taxes or getting a new homeowners insurance policy. It usually takes a few months before your next tax bill goes into effect, and in the mean time you will continue paying the old property tax rate into your escrow account. Homeowners insurance policies can take effect immediately, but some escrow companies prefer to wait until the end of the year to reconcile their accounts, so in the mean time you may continue paying the higher rate, which may result in an overage an refund the following year. But that’s better than the alternative of an increased mortgage payment!