If you struggle each month to make your mortgage payment, you're not alone. Financial challenges such as a job loss, drop in household income, or major medical bills could make paying a mortgage that was once affordable a financial burden. The Federal Reserve Board reported that in the fourth quarter of 2016, 4.15 percent of residential mortgages in the United States were delinquent. (See also: 8 Signs You're Paying Too Much for Your Mortgage)
There is hope, though, if you are struggling to make your monthly mortgage payment. There are several steps you can take to lower the size of that payment.
The more years attached to your mortgage, the lower your monthly payment will be. With a longer term, your loan payments are stretched out over more years, making each monthly payment smaller.
Consider this example: If you take out a $200,000 15-year, fixed-rate loan with an interest rate of 3.4 percent, your monthly payment, not including your taxes and homeowners insurance, will be about $1,400 a month. Say you take out that same $200,000 mortgage loan but in the form of a 30-year, fixed-rate loan with an interest rate of 4.2 percent. Your monthly payment, again not including taxes and insurance, will be just $978.
If you are struggling to make the monthly payments on a shorter-term loan, contact your lender and ask to have your loan reamortized to one with a longer term. You won't need to go through an official refinance to do this. But lenders will charge you a fee, one that LendingTree says averages about $250.
Just remember, when you change your mortgage to one with a longer term, you'll pay significantly more in interest. This extra interest which could hit $100,000 or more if you take the full term to pay off your mortgage might be an acceptable cost if it helps you avoid falling behind on your mortgage payments and possibly foreclosing.
The most common way to lower your monthly payment is to refinance your existing loan into one with a lower interest rate.
Say you originally took out a 30-year, fixed-rate mortgage of $180,000 at an interest rate of 5 percent. Your monthly payment, not counting taxes or insurance, would be about $966. Now say you owe $160,000 on that loan and you refinance that amount into a 30-year, fixed-rate mortgage loan with an interest rate of 4.2 percent. That payment would now fall to about $782 a month, a savings of about $184 a month.
There is one big negative that comes with refinancing: You'll have to pay fees to do it. You can expect to pay about 1.5 percent of the amount you are refinancing in closing costs. For a loan of $180,000, that comes out to $2,700 in closing costs.
No homeowner enjoys paying for private mortgage insurance. This insurance, better known as PMI, protects the lender if you fail to pay your mortgage. Generally, it costs from 0.5 percent to 1 percent of your loan amount each year. So on a mortgage of $200,000, PMI can cost as much $2,000 a year, or about $166 a month.
You only have to pay PMI if you came up with a down payment of less than 20 percent of your home's purchase price when buying it. If you are paying PMI, you might be able to get rid of this expense, which would lower your monthly mortgage payment. You can request that your lender remove PMI once you have built at least 20 percent equity in your home. If you request this, your lender will send an appraiser to your home to determine its current market value. It will then calculate your equity to determine if you've hit that important 20 percent mark.
If you are like the majority of homeowners, a portion of every payment you send to your lender includes money used to pay off your property taxes. This is known as an escrow arrangement.
Under such an arrangement, your lender estimates how much money you'll need each year to pay your property taxes. If your lender estimates that your taxes will be $6,000 this year, it will add $500 to your monthly mortgage payment. It will then deposit that $500 into an escrow account. When your taxes are due, it will dip into this account to pay them on your behalf.
You might be able to reduce your monthly mortgage payment by requesting a reassessment with your county tax assessor's office or tax collector's office. If your taxes are reassessed and they drop, your monthly mortgage payment will fall, too.