Your mortgage is likely the largest investment in your life. It is also probably the largest monthly bill you pay. Did you know that you could be paying too much for your mortgage? If you have not reassessed your options in several years and things have changed for you financially, then you could find that you pay too much. Here are some things to consider to help you decide if you should refinance now and stop overpaying for your mortgage.
You are in a Better Financial Situation
What was your credit like when you first obtained your mortgage? Were you just middle-of-the-road or maybe you even had poor credit? Have things improved for you? Do you have better credit now? If so, you might be overpaying on your mortgage. Interest rates continue to stay low and if you had poor credit when you took out the mortgage, chances are you have a higher interest rate. Talk to a lender today to see if you qualify for a lower interest rate. This will help you to save money now as well as in the long run. Typically, even just 0.5% savings on an interest rate can amount to thousands of dollars saved over the life of the loan.
You Have Higher Income
Has your income increased since you took out your mortgage? Typically small raises don’t make a big difference. However, if you changed jobs and have a significantly higher income, you may be eligible for a lower interest rate. Consider the difference between your income now and then. Is the difference significant? How is your debt ratio? Is it on the lower end? If so, you might be paying too much. As your financial position improves, you can typically obtain a lower interest rate and better terms. It is worth checking out to see if a lender can offer you a lower interest rate to save you money.
Your ARM Adjusted and You Didn’t Refinance
If you had an adjustable rate mortgage that already passed the initial period, you likely have a higher interest rate than you need. The teaser rate likely saved you plenty of money during the introductory period of the loan, but now that period is over. Your interest rate is now dependent on the market and its corresponding index. If it increases several times, chances are you pay more than today’s market rates. If you have not looked into today’s rates and how they compare with what you pay, then you could be paying too much for your mortgage.
You Have a Jumbo Loan That you Never Refinanced
Another way you could have a higher than necessary mortgage payment is if you took out a jumbo loan when you bought your home. In the past, jumbo loan interest rates were much higher than standard conforming loans. While you might not have had much of a choice at that point, if you have not reassessed your situation, you could be paying too much. This can happen several ways:
- If you paid your principal down enough over the years that your loan is no longer a jumbo loan, you have a higher than necessary interest rate.
- If interest rates were much higher when you took the loan out than now, you could refinance and save money on your loan despite having a jumbo loan amount.
You Had Numerous Debts When You Took Out Your Mortgage
If you had a high debt ratio when you took out your mortgage, chances are they adjusted your interest rate to make up for the risk. If you have straightened out your finances since then, you might be overpaying. Take a close look at your current monthly obligations and how they compare to your monthly income. If your debt ratio is in line with most of today’s conforming programs, which is around 28/36%, then you may be eligible to refinance into a lower interest rate and save money every month.
If you think you are paying too much for your mortgage, consider talking to a lender about your options. You are not obliged to refinance just for inquiring about your options, so you have nothing to lose. In fact, you could shop around with several lenders to determine who has the best program and interest rates for you. As you compare your options, you can see if it makes sense to refinance or to leave your mortgage as it is now.
It is important to remember that when you refinance, you have to pay closing costs all over again. You also start over from scratch on the term. If you already paid 10 years or so on a 30-year mortgage, you should consider a 20-year term when you refinance. This will help you to stay on track with paying your mortgage off at the same time as you were while helping you to save money on interest.
