Buying a home is the fulfillment of a long-held dream for many people, as well as a big step toward financial security . . . sometimes. It can also be a huge financial burden if your mortgage is too high.
If you think you might be paying too much for your mortgage in , look into the smaller details that can be the reason. It may be possible for you to pay less.
Why You Might Be Paying Too Much for Your Mortgage in
You Got a Fixed-Rate Mortgage and Left It Alone
One reason you may be paying too much for your mortgage is that, years ago, you got a fixed-rate mortgage and then just forgot about it and left it alone. It’s easy to do: just make the monthly payments without paying any attention to fluctuations in interest rates. But you shouldn’t be locked into a higher interest rate than is absolutely necessary.
If you bought your home on a fixed-rate-mortgage basis over a decade ago, then it’s likely your interest rate is higher than what is currently available. Right now, the rate for a 30-year fixed-rate mortgage is hovering right around 4%. If your rate is higher than that, you should probably look into refinancing.
You Need an Adjustable-Rate Mortgage
The attraction of a fixed-rate mortgage is that you’re locked into a certain rate and you know what you’ll pay over the life of the loan. But this has drawbacks, and in some cases, an adjustable-rate mortgage (ARM) would be better, even though it is often considered riskier.
An ARM starts out with a very low-interest rate, and then it adjusts in accordance with the market, hence the “adjustable” part of the name. These instruments were frowned on after the housing bust, but today’s ARMs have more consumer safeguards.
An ARM can be a great choice in certain situations. If for example, you don’t intend to stay in your new home more than a handful of years, you can take advantage of the ARM’s low initial interest rate. And then you can sell the home before the adjustment comes into effect and the higher interest rate kicks in.
The Principle Isn’t Going Down Fast Enough
You can also know that you’re paying too much for your mortgage in if the loan principle just barely goes down with each payment. In general, you pay more interest and less on the principle in the beginning. And then as the lender reduces risk by collecting a large share of the interest, the interest part of the payment decreases and more of it goes toward the principle.
But if, after paying on the loan for several years, you see the principle has barely been paid down, then there’s a problem. Usually, it’s because the loan term is too long or the interest rate is too high – or both combined. The solution here is refinancing, adjusting one or both of those elements.
Your Income Has Increased
When you bought your home, the interest rate was based in large part on your household income at the time. But if that was several years ago, you’ve likely received pay raises and are making a good deal more money. And you should qualify for a lower interest rate.
With a much higher monthly household income, you are less of a risk for the lender. Odds are good that you can get lower interest or a shorter loan term or possibly even both. This will save you money over the long haul because you’ll wind up paying far less in interest.
Like all of us, you don’t want to pay a penny more for your mortgage in than you absolutely have to. So if think you are paying too much for your mortgage, consider the refinancing options we’ve outlined here.