After signing your mortgage agreement, your initial interest rate isn’t necessarily permanent. Whether you have a fixed or adjustable rate, it’s possible to renegotiate your interest rate and lower your monthly payments without refinancing your loan.
It’s possible to lower your interest rate by improving your credit profile. Lenders consider your credit score as a key indicator of your financial riskiness. Lowering your outstanding credit card debts, improving your credit history, and varying your credit mix may increase your score.
Before closing on your mortgage loan, you can potentially reduce your interest rate by purchasing mortgage points, paying a larger down payment, or improving your credit profile before applying.
The interest rate paid on your mortgage can make the difference between an affordable monthly payment and an overwhelming burden. Even a single percentage point can have a significant impact.
If you’re locked in to a mortgage payment that is becoming unaffordable, know that it may be possible to lower your interest rate. A good start is to improve your credit profile – and that often means paying down credit card debt.
For homeowners who have established equity in their homes, a home equity agreement could be a way to help you do that.
Ways to reduce your mortgage interest
A mortgage payment is typically a homeowner’s largest monthly expense. It’s not just the repayment of principal, but also the payment of the monthly interest that you must budget for.
When you apply for a mortgage, you usually choose between a fixed-rate loan and an adjustable-rate loan.
Although the fixed-rate loan may have a higher interest payment (at first, anyway), the benefit is that you always know your monthly mortgage cost. The adjustable rate may begin with a lower interest payment, but such loans frequently become more expensive with time as the rate grows.
In either situation, life events can render your mortgage payment unaffordable. If that occurs, you can potentially lower your interest payment by refinancing.
Refinancing your mortgage
You may be able to lower your monthly interest payment by refinancing the loan. To “refinance” a mortgage means obtaining a new loan that pays off the existing loan.
The process works just like applying for your initial mortgage. A lender will review your employment history, income, proposed repayment term, property value, and credit history and score, among other factors.
Improve your credit score
One of the best things you can do before refinancing is to improve your credit score. The higher your score, the more likely it is that you can obtain a lower interest rate. This is because lenders assume higher scores means less risk.
About a third of your score is derived from your outstanding credit card debt. Usually, if you can keep your outstanding debt at or below 30% of your credit limit per card, your score will benefit.
While you could pay down your debt over time, it’s also possible to pay off any balance you carry with funds from a home equity agreement (HEA). HEAs allow you to access the equity established in your home.
In exchange for a percentage of your home’s future value, the HEA provider offers a lump-sum payment now. You can use this lump sum for all kinds of things, including to pay off credit card debt.
For example, say you have $25,000 in outstanding credit card debt. You could obtain $25,000 through a home equity agreement, pay off your credit card debt, and then apply to refinance your home loan. Note that it may take 4-6 weeks for your credit reports to reflect the payment.
Then you could refinance, hopefully at a lower rate than your current mortgage loan. Some people use the savings gained through refinancing at a lower rate to buy out their equity in their HEA early on.
Consult a finance expert to determine whether this or any method for reducing mortgage interest is right for you.
Other ways to reduce interest when refinancing
When you refinance, you’re essentially applying for a new home loan. This means you can take advantage of the following opportunities:
Purchase mortgage points: One mortgage point, also called a discount point, is a fee you pay to lower your interest rate. One point represents 1% of your outstanding mortgage, and your interest rate will be reduced by a set percent for each mortgage point you buy. By purchasing mortgage points, you are effectively prepaying the interest so you have a smaller monthly payment.
Make your mortgage payment in two installments each month: Consider paying your monthly mortgage in two installments each month, one every two weeks. Each payment would be half of the month’s mortgage. Because there are 52 weeks in a year, this would result in 26 total payments, or one extra monthly payment per year. These extra payments reduce your principal and, therefore, the total interest paid.
Lowering interest without refinancing
Refinancing a home mortgage is the most common method of lowering the loan’s interest payment. Lowering your interest without refinancing is possible, although may prove more difficult.
First, your lender may allow a mortgage modification. This lets you to change the original loan’s terms due to financial hardship. The lender may:
Extend your mortgage’s repayment term
Reduce the outstanding principal balance
Lower the existing mortgage rate
While this may result in a less expensive mortgage, be mindful that a lender is unlikely to modify your mortgage without evidence of dire financial hardship.
Typically, you must already have missed at least one payment – which can severely affect your credit score. It’s probably not a good idea to seek a modification unless you’ve already fallen behind.
Improve your credit profile with a HEA from Unlock Technologies
Your home is likely your most important asset. It brings together your family, provides a home office and gives you peace of mind. When your mortgage payment becomes unaffordable, that can turn your refuge into a burden. With a home equity agreement from Unlock Technologies, you can use funds to pay down outstanding credit card debt, improve your credit profile and work to get in the best credit shape possible before applying for a new mortgage.
Contact us today to get started.
The blog articles published by Unlock Technologies are available for informational purposes only and not considered legal or financial advice on any subject matter. The blogs should not be used as a substitute for legal or financial advice from a licensed attorney or financial professional. Links in our blog posts to third-party websites are provided as a convenience and are for informational purposes only; they do not constitute an endorsement of any products, services or opinions of the corporation, organization or individual. Unlock Technologies bears no responsibility for the accuracy, legality, or content of external sites or that of subsequent links.