Do Mortgage Payments Decrease?

July 25, 2011
Do Mortgage Payments Decrease?

Mortgage Q&A: “Do mortgage payments decrease?”

While everyone always seems to focus on mortgage payments adjusting higher, there are a number of reasons why a mortgage payment may actually decrease.

No really, there are, so let’s take a look, shall we…

Mortgage Payments Decrease on ARMs

  • While perhaps not as common as going up
  • Monthly payments can drop
  • If you have an ARM and the associated mortgage index falls
  • But don’t bank on it

If you have an adjustable-rate mortgage, there’s a possibility the interest rate can adjust both up and down.

You may have seen that now infamous interest rate reset chart, the one that shows billions of dollars worth of mortgages resetting from their fixed-rate period into their adjustable period.

Today's Rates

Well, the damage may not be as bad as it originally appeared because many of the mortgage indexes tied to these loans are now rock-bottom.

As a result, some homeowners who stayed in these seemingly “exploding ARMs” may actually see their mortgage payments fall. And the savings could be significant.

When You Pay Down Your Mortgage

  • If you make a large lump sum payment
  • And get your lender to recast your loan
  • Your monthly payment can go down significantly
  • But without a recast, extra payments won’t lower future payments

If you decide to pay off a large chunk of your mortgage, you can ask the mortgage lender to recast your loan (if they allow it).

This essentially re-amortizes the mortgage so the new, smaller balance is broken down over the remaining months left on the loan.

Your monthly mortgage payment is adjusted lower to reflect the smaller outstanding principal balance, but your mortgage rate doesn’t change.

While this could increase household cash flow, you may be better suited to pay off your mortgage early by making your old, higher payment despite the lower balance.

[Pay off the mortgage or invest instead?]

Keep in mind that mortgage payments won’t decrease automatically simply by making extra payments. All that will accomplish is a quicker payoff period and interest savings.

For example, if you pay an extra $500 per month on a $300,000 mortgage set at 4%, you’ll pay off the loan 11 years and 8 months early. But payments will be the same every month until the loan is paid in full.

In other words, future payments won’t go down to reflect earlier ones, but because the loan will be paid off sooner than scheduled, you will save more than $92,000 in interest over the life of the shortened loan.

Refinance to a Lower Rate

  • This is the most common reason why mortgage payments drop
  • And largely why homeowners refinance their mortgages
  • So if interest rates are low and you’re looking for payment relief
  • It might be time to trade in your old home loan for a new one

Here’s a no-brainer. If you want a lower mortgage payment, look into a rate and term refinance.

Because mortgage rates are still very low, your mortgage payment will probably decrease significantly if you refinance now.

However, that doesn’t mean it’s always a good time to refinance.

[When to refinance a mortgage?]

Still, this is one of the most popular and easiest ways to lower your mortgage payment. It just requires a little bit of work on your end.

If you’re not sure whether to refinance or not, consider the refinance rule of thumb argument.

Shop Your Insurance, Look Into a Tax Reassessment

  • Look beyond your mortgage rate
  • It might be possible to lower your payment
  • By shopping around for homeowners insurance
  • Or getting a tax reassessment if you feel your property value has dropped
  • A simple escrow surplus can also result in a lower payment

Finally, be sure to shop your homeowner’s insurance, as it is typically included in your mortgage payment.

If you can snag a lower home insurance premium, your mortgage payment may decrease as a result. Another pretty simple way to save money.

Assuming you didn’t waive escrows, your loan servicer will collect a portion of property taxes and homeowners insurance with each principal and interest payment, then pay these items on your behalf.

If either decrease from a year earlier, your housing payment may go down as well after they run their annual escrow analysis.

Also look into a tax reassessment of your home if you feel it is overvalued.

If property values have been on the decline, you may be able to save some money on property taxes by asking your county recorder’s office to reassess your property. Of course, it doesn’t always work out as planned so tread cautiously.

Remember, a mortgage payment is typically expressed as PITI, which stands for principal, interest, taxes, and insurance.

So be sure to address each component to save money on your monthly housing costs.

See also: Do mortgage payments increase?


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