When it comes to financial flexibility, a mortgage payment is one expense that can really hold you back from accomplishing your goals. But if you can find a way to lower your payment, you’ll open up a world of new opportunities.
Are You House Poor?
According to Investopedia, house poor is: “A situation that describes a person who spends a large proportion of his or her total income on home ownership, including mortgage payments, property taxes, maintenance and utilities. House poor individuals are short of cash for discretionary items and tend to have trouble meeting other financial obligations, such as vehicle payments.”
By one account, as many as 30 percent of all American households are house poor – meaning they have zero or negative non-housing wealth and have very little spare income to put toward other investments.
While it’s nice to have a big, fancy house, you should recognize the difference between actual wealth and aspirational wealth. Actual wealth is when you have a sizeable net worth with cash, investments, and assets on hand. Aspirational wealth is when you simply want to be wealthy or want other people to think you’re wealthy.
If you aren’t careful, you can let aspirational wealth dictate your financial decision making. And since a person’s house is often the most visible signpost of their financial status, this will eventually lead you to become house poor.
5 Ways to Lower Your Monthly Payment
The good news is that you don’t have to be house poor. There are numerous ways to lower your monthly mortgage payment and leave room in your budget to save and invest. Here are a few options:
1. Buy a Cheaper House
The obvious way to lower your monthly payment is to buy a cheaper house. While most people like to purchase as much house as the bank will approve them for, you should consider what price point fits comfortably into your budget.
For example, do you really need a $400,000 house when you can get a comparable home that’s a few years older and has less bells and whistles for $325,000? The number the bank approves you for and the amount you spend don’t have to be one and the same. Crunch the numbers and consider whether the house would still be affordable if one spouse was to lose a job or if you were to take a significant pay cut. There should be enough cushion in your budget to keep payments current.
2. Make a Larger Down Payment
The second-best thing you can do is make a larger down payment when buying a house. By putting down a bigger chunk of cash, you don’t have to borrow as much from the bank. Not only does this lower your monthly payment, but it could also save you thousands of dollars in interest over the life of the loan.
3. Eliminate Private Mortgage Insurance
Another benefit of making a larger down payment is that you could potentially eliminate the need for private mortgage insurance (PMI), which is generally required when a buyer fails to put up a down payment of 20 percent or more. And while it may seem like a normal cost of buying a house, it can get expensive!
“Premiums are calculated based on the loan total and range anywhere from 0.5% to 1.5% of the loan,” personal finance expert Dave Ramsey explains. “You can choose to pay the whole premium up front with closing costs, or you can split it into payments over the first few years of your mortgage.”
If you were to take out a $200,000 loan on a $225,000 property, this means you’d expect to pay between $83 and $250 per month until you pay the mortgage principal down to $180,000 (which will likely take a few years).
By saving up money and waiting to buy a house until you can afford a 20 percent down payment, you’ll save hundreds (maybe thousands) of dollars per year.
4. Get a Better Interest Rate
When was the last time you checked interest rates? If you’re currently locked into a high-interest loan, you could save thousands of dollars per year by refinancing to a lower rate. Run your numbers through an online home loan calculator to get a feel for what options you have.
5. Extend Repayment Terms
While not the preferred option, you can technically refinance and extend your repayment terms. Though this will cost you more in long-term interest, it could technically save you money on a month-to-month basis. If you’re crunched for cash and don’t want to move, this method will provide some immediate relief.
Give Yourself Room to Breathe
There’s more to managing money than keeping your monthly mortgage payment low, but it sure helps all of the other pieces fall into place. Saving a few hundred dollars on your mortgage payment allows you to invest, save, pay down debt, or purchase items that are good for your health and well-being. It also gives you more financial flexibility to address home maintenance (which is integral in protecting your financial investment).
At the end of the day, it’s your money and your decisions. However, if you want to relieve some of the pressure that comes with making ends meet, do your family a favor and lower your monthly mortgage payments using some of the aforementioned techniques and strategies. You won’t regret it!