The Interest Rate Has Dropped
Mortgage interest rates have been steadily dropping since the 1980s, and anyone who purchased a house at least 10 years ago could be paying 2.5 to 3.5 percent more interest on the remaining balance than necessary. Long-term homeowners should consider talking with their local bank about refinancing their mortgage, a move that could save them big bucks in the long run.
Your Mortgage Is More Than 30 Percent of Your Income
Financial advisers and real estate professionals recommend that homeowners spend no more than 30 percent of their monthly income on their mortgage payment. This ensures you’ll still have sufficient funds for food, health care, car payments, and other expenses. If you’re currently spending more than a third of your income on your mortgage, consider moving to a less expensive home, or talk to your banker about refinancing your mortgage over a longer period to reduce the monthly payment.
You Have Experienced a Decrease in Household Income
Household income can take a tumble for a variety of reasons, including losing a job, choosing to become a stay-at-home parent, or getting a divorce. Any of these occurrences can make it much harder to pull together that monthly mortgage payment. Try refinancing your home with a longer-term mortgage to reduce monthly household costs. If that isn’t feasible, it may be time to look into buying a more affordable property.
You’ve Improved Your Credit Rating
Lenders offer their best interest rates to home buyers with the highest credit scores. If you’ve recently improved a dismal credit score, it doesn’t hurt to talk to your lender to see how much you could save by refinancing. Check out FICO’s loan savings calculator to see how your credit score influences mortgage interest rates.
Related: 10 Decisions Homeowners Never Regret
Your Adjustable-Rate Mortgage Jumped
An adjustable-rate mortgage (ARM) offers home buyers a low initial interest rate for a set period— anywhere from a few months to a few years. After that time, the interest rate adjusts, which may result in higher monthly payments. ARMs can be ideal for buyers who don’t plan to stay in their homes long, but if your interest rate is scheduled to change soon and you have no intention of moving on, talk to your banker about refinancing the balance and switching to a fixed-rate mortgage.
Your Mortgage Term Is Too Long
Did you take a 30-year fixed mortgage on your home so you could enjoy low payments? In actuality, you’ll wind up paying more interest than those who opted for larger monthly sums for a shorter time frame. For example, if you finance a $200,000 house for 30 years at 4.5 percent interest, you will have paid a total of $364,813 when your mortgage payments are complete. By comparison, if you finance the same house at 4.5 percent for just 15 years, you’ll pay a total of $275,398. That’s an almost $90,000 difference! To get an idea of how the length of your mortgage affects the final house cost, check out an amortization calculator.
Your Mortgage Term Is Too Short
Taking a shorter-term loan saves money in the long run, but if you’re struggling with a high monthly payment, your quality of life can suffer. Consider refinancing over a longer period of time to reduce your monthly payments, thus alleviating the strain on your budget. You can always make double payments if finances allow; this will effectively reduce your interest rate.
You’re Paying Mortgage Insurance
If you didn’t make a 20 percent down payment on your house, your lender charged you for private mortgage insurance (PMI)—and you’re shelling out for PMI with every monthly payment. PMI is based on the difference between the market value of your home and the amount of equity you have in it. For example, if you finance $100,000 on a home with a market value of $110,000, you could be paying an additional $75 every month for PMI. Once you’ve paid 20 percent of the value of your home, you will no longer be charged for PMI. If you think your home has increased in value (which means your equity has also increased), ask your lender for a new appraisal to see if you now meet the 20 percent equity requirement.
You’re Struggling to Make Ends Meet
Unforeseen costs, such as a sudden illness or unexpected home repairs, can strike at any time. If savings won’t cover the expenses, your budget will inevitably become a bigger burden. Those struggling to make ends meet should consider moving to a less expensive house or talking to their lender about refinancing the mortgage to reduce monthly payments.
You Have Negative Equity
If your home’s market value dropped after your purchased it, you’re dealing with “negative equity”—meaning you’re paying more than your home is worth. You have two options: sitting tight (because the home may eventually increase in value) or talking to your lender about a short sale (selling your home for less than the amount you owe and having your lender absorb the loss). Always talk to a financial adviser before pursuing a short sale, because it will negatively affect your credit rating. A short sale may also have an impact on your income taxes.
Related: 10 Decisions Homeowners Never Regret
Manage Your Mortgage
Do you relate to any of these scenarios? If so, you should investigate your financial options and see if it is possible to refinance. While the process might be time consuming, you'll be happy when you're paying less.
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