As homeowners grapple with high mortgage payments, many are seeking relief amid expectations of potential Federal Reserve rate cuts. With rates hovering around or above 7%, millions of borrowers are feeling the financial strain, which is impacting their overall household budgets. However, mortgage professionals suggest that there are several strategies available to help homeowners reduce their monthly payments this fall.
Strategies to Lower Mortgage Payments This Fall
Experts recommend three primary methods for homeowners looking to lower their mortgage payments: refinancing, mortgage recasting, and loan modification. Each option has its own set of requirements and benefits, making it essential for homeowners to assess their individual situations before proceeding.
Refinancing to a Lower Rate
Refinancing involves obtaining a new loan to replace an existing mortgage, typically to secure a better interest rate or more favorable terms. This process usually takes between 45 to 60 days and is most beneficial when homeowners can secure a rate that is at least 0.75% to 1% lower than their current rate.
According to Steven Glick, director of mortgage sales at HomeAbroad, current rates around 6.5% to 6.6% can lead to significant savings for those who locked in rates above 7%. However, homeowners should be aware of closing costs, which can range from 2% to 6% of the loan amount. For instance, if a homeowner refinances to a rate of 6.7% and saves $163 per month, but incurs $5,000 in closing costs, the breakeven point would extend to 31 months.
Eligibility for refinancing varies based on the type of loan:
- FHA Loans: Homeowners with existing FHA loans may qualify for a Streamline Refinance, which has minimal requirements.
- VA Loans: Those with VA loans may be eligible for a VA Interest Rate Reduction Refinance Loan (IRRRL), which offers streamlined options without the need for an appraisal or income verification.
- Conventional Loans: Borrowers typically need a credit score of 620 or higher, steady income, and ideally 20% equity to avoid private mortgage insurance.
Applying for a Mortgage Recast
A mortgage recast is a lesser-known option that allows homeowners to make a large payment toward their mortgage balance. The lender then recalculates the monthly payment based on the reduced balance, while the loan term remains unchanged. This option is generally quicker and more affordable than refinancing, taking about 30 days and costing between $150 to $500.
To qualify for a mortgage recast, homeowners typically need a conventional or jumbo loan, a minimum lump sum payment of $5,000 to $10,000, and a clean payment history. While this option does not lower the interest rate, it can provide immediate relief for those with already low rates. For example, applying $50,000 toward a mortgage could reduce monthly payments by approximately $325.
Seeking a Loan Modification
A loan modification involves adjusting the terms of the existing loan to make payments more manageable, particularly during financial hardship. This can include reducing the interest rate, extending the loan term, or temporarily pausing part of the payment. Homeowners must demonstrate genuine hardship and provide documentation such as pay stubs, tax returns, and proof of hardship.
Glick notes that lenders typically look for borrowers at risk of default or already behind on payments. Modifications can aim for a 20% to 30% reduction in payments, but the process can take 60 to 90 days and may negatively impact credit scores if the borrower is already delinquent.
Conclusion
Homeowners facing high mortgage payments have several options to explore this fall. Whether through refinancing, mortgage recasting, or loan modification, each strategy offers potential relief tailored to individual circumstances. It is crucial for homeowners to prepare their financial documents and clearly communicate their goals when engaging with lenders. For those feeling overwhelmed, consulting a HUD-approved housing counselor can provide valuable guidance in navigating these options effectively.
