Lower Monthly Mortgage Payments: A Quick Guide

Once word spread about the federal government’s proposed $700 billion Wall Street bailout, mortgage rates stopped dropping as they had been after the Sept. 7 takeover of Fannie …

Once word spread about the federal government’s proposed $700 billion Wall Street bailout, mortgage rates stopped dropping as they had been after the Sept. 7 takeover of Fannie Mae and Freddie Mac and jumped back up. Mortgage rates increased across the board this week after declining for several consecutive weeks, according to Freddie Mac’s weekly survey of mortgage rates, released today.

For the week ending today, 30-year fixed-rate mortgages averaged 6.09 percent, up from 5.78 last week. One year ago, a 30-year fixed-rate mortgage averaged 6.42 percent. While last week, a 15-year fixed-rate mortgage averaged 5.35 percent, this week the rate had climbed to 5.77 percent. The same mortgage had an average rate of 6.09 percent a year ago.

“Mortgage rates followed Treasury bond yields higher this week amid market uncertainty over the current state of the economy,” Frank Nothaft, vice president and chief economist of Freddie said in a statement. “Compared with last Thursday, 10-year Treasury yields are up about 0.3 percentage points, and 30-year fixed-rate loans moved up about the same amount. And while up, interest rates for 30-year FRMs are still more than 0.5 percentage points below this year’s peak of 6.63 percent set the week of July 24th.”

Because mortgage rates are lower than they were at this time last year, many homeowners are considering refinancing their mortgage loan in this tough market. With rising rates, failing banks and other confounding factors, such as skyrocketing foreclosure rates, it’s a step that many are considering as a means of staying afloat.

Paying a high monthly mortgage payment is difficult for many of today’s borrowers, and sometimes unnecessary. There are a few common strategies for lowering monthly mortgage payments. It’s important to understand what composes a mortgage payment in order to understand how to lower it:

  • Principal: the amount financed
  • Interest: the percentage rate agreed to for the term of the loan
  • Taxes: property taxes are usually incorporated into the monthly payment
  • Private Mortgage Insurance (PMI): required by the bank if more than 80 percent of the house is leveraged (this is different than homeowners’ insurance)

Loans also come with another set of terms and costs:

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  • Fees: Origination fees, charged by lending institutions, vary significantly. Consumers can ask up front what lenders’ fees are. Make sure to ask about their products and get the total price of the loan, called Good Faith Estimates (GFE). Rather than having each lender pull credit, which can damage credit scores, get a GFE. If the lender cannot disclose all fees, start asking questions to get closer to the answer. Loan programs disappear over night, so be prepared to act.
  • Points: 1 percent of the mortgage amount, charged as prepaid interest. For each point purchased, the interest rate of the mortgage is typically reduced by 0.125 percent.

Strategy 1: Using equity to avoid PMI

Private mortgage insurance is required for borrowers who owe more than 80 percent of their houses’ value. Insurance tends to add a few hundred per month, depending on the value of the house. For borrowers who are close to the threshold, they may benefit from making a hefty payment on the principal. While it could seem counterintuitive to spend thousands to save hundreds, the money spent goes toward the principal thereby creating more equity for homeowners.

Strategy 2: Refinance to lower interest rates

Borrowers with credit scores in the low to mid 600s were able to obtain mortgages on the subprime market. Many of those borrowers are still in the same mortgage loan, but could qualify for an improved rate based on improved credit scores. On-time payments, less unsecured debt (such as credit cards) and increased salaries all help.

Be prepared to present a credit score of 700, and expect to pay high fees. While the federal government’s takeover of Fannie Mae and Freddie Mac resulted in lower mortgage rates, the fees associated with borrowing rose for many consumers. For those who have credit scores below 700, the fees will be even higher and it will be extremely tough to get approval. The payoff is that consumers can benefit in the long run from lower interest rates.

Strategy 3: Refinance to a conventional loan

Many homebuyers opted for an adjustable rate mortgage (ARM) to purchase their homes. Rates were incredibly affordable, until the loans readjust to a much higher amount, usually making the monthly amount nearly impossible to pay. Joyce Windschitl, a mortgage consultant at Minnesota-based Prime Mortgage, said she advises homeowners in these situations to make a change, and soon. “No one should continue with a subprime ARM because of the high interest rates and the current low interest rates—unless there is absolutely no other option.”

Windschitl said she advises to ignore advertised rates by lenders. “To me advertised rates have absolutely no value. Rates are subject to many factors including debt to income, credit score, loan to value, and whether it is a purchase, rate and term refinance or a cash out refinance.”

Strategy 4: Sell and buy another

According to Joyce, “There are a number of options including: renting a room until their credit score is high enough so they are not penalized in obtaining another mortgage, refinancing if they would qualify for a conforming loan or placing the house on the market for sale.” In today’s market, it’s a tough choice to sell as the housing prices tumble because of overstock.

Stagnant housing markets in traditionally expensive areas are supposed to receive increased attention since the agencies are now offering loans in the high $790,000s in some areas. The caps fluctuate by county to reflect the median home price. Consult real estate professionals to discover how this may affect local markets and mortgage professionals to learn about Freddie Mac and Fannie Mae offerings.


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