The real estate market crash of 2009 created a wake of chaos. People were laid off from their jobs and couldn’t afford their mortgages, which were now underwater. Interest rates decreased to help stabilize the market. They rose, then plummeted again in 2021 to help stimulate borrowing.
That was a great time to buy a house. Let’s say you were able to purchase a $750,000 home with a 20% down payment of $150,000 and an interest rate of 3.885% for a 30-year loan. Your monthly payment would cost $2,825 a month, not including taxes, insurance and other fees. That same loan with a 6.885% interest rate would cost $3,946.
The good news for borrowers is that the Fed’s recent interest-rate cut means it’s less expensive to borrow money. Staci Pratt, a California-based mortgage broker and real estate agent, says the last time money was cheap, home prices skyrocketed. “It was really difficult for people to buy.” But she thinks this time it’s different. “I'm anticipating it's going to be a gradual reduction, but there's going to be a reduction.”
For those who do have a mortgage payment currently, no matter when they purchased their homes, here are some steps to consider to lower the monthly bill.
Drop your mortgage insurance
I got a letter from my lender letting me know the home I purchased in 2018 had gained value and it was possible to drop my PMI (private mortgage insurance), which had been running me $92 a month. After an appraisal, the bank deemed that my home had indeed appreciated to 80% or more of the loan value. That’s the magic number: If you put less than 20% down on a conventional 30-year-loan, you’ll also be saddled with PMI. I asked Pratt if PMI is a scam. After all, don’t they get my house if I default?
Pratt explained: “What if you overpaid and went underwater?” That did happen, a lot, in 2009. PMI is a payment that helps the bank feel better if you default on an underwater mortgage. On the flip side, if you have a loan but not the 20% down, the PMI may be the difference between owning and not owning that home.
Credit Karma has a calculator to help you figure this out, and a better credit score means a lower PMI rate. You may have to do some math to figure out if you want to bank that extra to save for down payment on a home later on, or if owning a home that will likely appreciate is worth the extra money each month. This is a great conversation to have with your mortgage broker or finance professional.
Refinance
Yes, it can be expensive to refinance. If you’re planning to move in the next year or two, it might not be worth it. But if you’re planning to own the property for a long time, it may be a smart move. Look carefully at the numbers to see at what point you’ll recoup those costs and start saving.
Pratt suggests talking to a mortgage broker about options — even a percentage point or a point and a half can be a significant drop. Your PMI is also re-evaluated because a refinance involves a new appraisal.
Note that a refinance resets the clock. If you were planning to pay off your loan in 10 years, you’d have to restart your timeline, depending on the terms of your new mortgage.
Reverse mortgage
This is for older homeowners who want to leverage the value of their home without having to sell it — the mortgage company takes a lien and pays out the borrower in regular installments. The borrowers must be at least 62 years old and go through a screening process to make sure they understand how it works. If the borrower only lives a year or two after obtaining the reverse mortgage, there would likely still be equity in the home. But, Pratt says, if the borrower gets the loan at 70 and lives to, say, 120 while collecting payments the entire time, the mortgage company takes the loss. This is also one of those deals you need to be absolutely clear about in case you plan on leaving your home to your heirs.
Mortgage recast
Here’s an option for folks who have a chunk of money, either from savings, a windfall or cashing out of another investment. Pratt uses the example of someone who takes an $800,000 loan for a new home before they’ve sold their current one. When that first home sells a few weeks later and the borrower has $300,000 in cash, they can pay that on their existing mortgage, making the new loan amount $500,000. At 6% for 30 years, the monthly payment would drop from $4,796 to $2,998.
Assess insurance and taxes
Many borrowers choose to include property taxes and home insurance rolled into their monthly payment. Check with your insurance agent to make sure you’re getting the appropriate coverage at the best price. If property values have gone down, it may be worth appealing to your tax board for a lower assessment value; many people did this successfully during the 2009 crash. But know this can also backfire if the county reassesses your property for a higher value and you end up paying more in taxes.
A final thought
Do low interest rates today mean we’re at the beginning of a downward trend? You may want to take the wait-and-see approach, but never take anything for granted. “I wouldn't tell anyone to gamble and wait, because interest rates change every single day. And you can always re-fi in 6 months to a year again,” Pratt said.
Almost any purchase is a guess — will the price of eggs go down tomorrow? Will this car company offer a huge rebate next month? But the best way to go into moving money is to learn as much as you can about how any changes will affect your situation before you sign a ream of papers. Math isn’t always fun, but it’s definitely your friend.
