A mortgage payment is the amount you pay each month to service your home loan. This includes principal, interest, taxes, and insurance. Lowering your mortgage payment can free up room in your monthly budget and help you achieve financial goals more quickly. There are several proven methods to reduce your mortgage payment if you want to save money.

A mortgage payment is made up of four key components:

• Principal – This is the amount that goes towards paying down the loan balance. 
• Interest – The amount charged by the lender for borrowing the money. Interest rates and loan terms affect how much of the payment covers interest.
• Taxes – Money collected to pay the annual property taxes on the home. 
• Insurance – Funds allocated to pay for homeowners insurance covering the dwelling.

Standard fixed-rate mortgages have constant principal and interest portions for the life of the loan. However, the amount for taxes and insurance can fluctuate annually. Adjustable-rate mortgages have varying principal, interest, and mortgage payment amounts.

Why Would You Want to Lower Your Mortgage Payment?

There are several financial benefits to lowering your monthly mortgage obligation:

• Cash flow – Paying less for housing each month frees up room in your budget for other goals like saving, investing, or paying down high-interest debt.
• Wealth building – Putting extra money towards paying off your mortgage early can help you build home equity faster. 
• Affordability – Lowering a too-high house payment improves housing affordability if your income has decreased.
• Credit score – Paying down balances, including your mortgage, can improve your credit utilization ratio and boost credit scores.

As an example, every 1% decrease in your mortgage rate could save you thousands of dollars over the life of your loan according to Freddie Mac. The savings can really add up.

What Factors Affect the Amount of Your Mortgage Payment?

Several key inputs determine the amount of your recurring mortgage payment:

• Loan amount – Also known as the principal, this is how much you originally borrowed. The higher the initial loan amount, the larger your mortgage payments.
• Interest rate – This is the percentage rate your lender charges annually for the money borrowed. Even small changes in rates can greatly impact payments. 
• Loan term – Standard terms are 15 or 30 years. The longer the term, the lower the payment amount.
• Payment frequency – Most mortgages have monthly payments, but biweekly or weekly repayment can reduce interest costs.
• Down payment – The more you put down upfront, the lower your monthly payment. A 20% down payment could save you an average of $160 per month on your mortgage payment according to Bankrate.
• Loan type – Government loans like FHA, VA, and USDA can offer lower rates that reduce payments. Arms also start with lower payments than fixed-rate loans before adjusting.
• Credit – Borrowers with excellent credit scores (760 or higher) typically qualify for the lowest mortgage rates per Experian data. A higher score means a lower rate and payment. 

Adjusting these factors through refinancing or other methods can potentially drop your mortgage obligation.

What are the Risks and Benefits of Lowering Your Mortgage Payment?

When evaluating options to reduce your payment, consider both the advantages and drawbacks:

Potential benefits

• Increased monthly cash flow
• Faster debt payoff and equity buildup 
• Improved budget flexibility
• Ability to meet other financial goals quicker
• Maintaining homeownership if income decreases

Potential risks

• Closing costs to refinance
• Reset of ARM interest rates
• Lengthening the mortgage term
• Less equity growth if you reduce principal payments
• Difficulty getting approved if credit scores drop

For many homeowners, the rewards outweigh the risks. But be sure to evaluate how lowering your payment impacts your unique situation.

How Can You Calculate Potential Savings from Lowering Your Mortgage Payment?

Lenders and mortgage calculators can help estimate your new payment and savings when refinancing or making other adjustments. Generally:

To calculate savings from a rate reduction:

Current Monthly Payment x (Current Rate – New Rate) / Current Rate = Monthly Savings

To calculate savings from a term extension:

Compare the monthly payments for your current term to potential new longer terms. The difference is your savings.

To calculate savings from extra principal payments:

Extra Payment Amount x Number of Months = Total Savings

Crunching the numbers can give you an idea of the monthly and lifetime financial impact of reducing your mortgage obligation.

1. Refinance Your Mortgage

One of the most effective ways to lower your mortgage payment is refinancing to a new home loan with better terms. Reasons to refinance include:

• Lower interest rate – You can lower your mortgage payment by refinancing to a shorter loan term says NerdWallet. Even a small rate drop can make a difference.
• Shorter loan term – Going from a 30-year to 15-year fixed-rate mortgage significantly reduces your payment. You pay the loan off faster too.
• Cash-out refi – Taking equity out through a cash-out refinance converts home equity to cash, which can pay off debts and lower other monthly payments.
• Loan type – Switching from a conventional to government-backed mortgage like FHA, VA, and USDA can qualify you for a lower rate. 

Be mindful of closing costs, which average $5,000 according to Bankrate. Shop around to compare refi offers. Refinancing works best if you plan on staying put for several more years.

2. Extend Your Repayment Term

Going from a shorter repayment term to a longer one drops your mortgage payment substantially, though you pay more interest over time. This strategy essentially resets the clock. Examples:

• 15-year mortgage refinanced to 30-year 
• 30-year mortgage refinanced to 40-year

Doing this frees up monthly cash flow for other priorities but can significantly increase your total interest costs over the life of the loan. Make sure to run the numbers to see if it makes sense for your situation.

3. Make a Larger Down Payment

Putting down 20% or more upfront not only lowers your loan amount, it helps you avoid costly private mortgage insurance (PMI). 

PMI costs average 0.5% – 1% of the total loan amount per year. Making a larger down payment to reach 20% equity removes this expense from your payment.

Additionally, a bigger down payment means you have to borrow less. This directly lowers the principal and interest portion of your recurring mortgage bill. 

Saving up to make a larger down payment takes discipline, but the long-term payoff can be significant.

4. Get Rid of Private Mortgage Insurance (PMI)

As mentioned above, private mortgage insurance adds to your payment when your down payment is less than 20% of the purchase price. It protects the lender in case you default.

Once you reach 20% equity either through appreciation or by paying down principal, you can request PMI cancellation. Removing this can shave $30 to $70 per month off your mortgage payment.

Applying additional principal or a one-time paydown is the fastest way to get rid of PMI. Refinancing is another option if home values have gone up.

5. Rent Out Part of Your Home

Renting out a mother-in-law suite, finished basement, or other separate unit gives you extra income you can apply towards your mortgage payment. 

Rents for basements or garages converted to living spaces average $1,100 per month according to HomeAdvisor. This provides cash flow you can use to supplement your payment.

Before doing this, check local zoning laws and insurance requirements. You also need to assess how comfortable you are having tenants. But for many, the financial benefits make it worthwhile.

6. Consider an Adjustable-Rate Mortgage (ARM)

ARMs start with reduced payments because they have lower introductory interest rates than fixed mortgages. Payments are fixed for set periods before adjusting up or down.

A 5/1 ARM keeps your initial rate steady for 5 years. After that, it fluctuates annually based on market conditions. This mortgage type offers low initial payments with the risk that they may jump substantially after resets.

ARMs can make sense if you plan on moving before the first adjustment. However, budget carefully for potentially higher future payments once the rate becomes variable.

7. Apply for Loan Modification Programs

If your payments have become unaffordable, loan modification programs offered by lenders and the government provide payment relief.

Modifications involve restructuring your existing mortgage terms to make it more affordable. Options include extending the repayment term, temporarily reducing the interest rate, and adding missed payments to the loan balance.

To qualify, you must demonstrate a financial hardship causing difficulty making payments. Modifications let you keep your home, but restart the clock on your mortgage.

8. Negotiate a Lower Interest Rate with Your Lender

Sometimes lenders are willing to negotiate your existing mortgage rate lower, particularly if you have an excellent payment history with them. This permanently reduces your interest costs and payment.

Another option is a temporary interest rate reduction. The lender lowers your rate for 12 months to help overcome a hardship before it returns to the original rate.

These voluntary reductions are not guaranteed, but it doesn’t hurt to call your lender and politely ask if any rate decreases are possible to lower your payment.

What Other Options Do You Have If You Can’t Lower Your Mortgage Payment?

If you are unable to decrease your payment through these methods, consider:

• Selling your home and downsizing to reduce expenses
• Taking on a roommate to collect rental income
• Cutting back discretionary spending to have more money for housing
• Looking into hardship assistance programs if you have lost income

While not ideal, these alternatives let you meet mortgage obligations if you cannot change the loan terms. As a last resort, discuss graceful exit strategies with your lender to transition the home to new owners.

Conclusion

A lower mortgage payment can create financial breathing room and help you achieve goals faster. Refinancing and extending the loan term are two of the most effective ways to reduce your payment quickly. Other options like increasing your down payment, removing PMI, taking on a roommate, negotiating with lenders, and exploring government programs also provide mortgage relief.

Carefully weigh the risks and rewards when evaluating strategies to decrease your payment. And be sure to consider your personal financial situation and goals. With the right approach, lowering your mortgage obligation can unlock savings and improve your long-term financial wellbeing.