Buying a home can be a great step along the path to financial freedom, but it can also become a burden if you’re not careful. A mortgage can be a heavy weight on your finances if you either buy a house you can’t afford, or get locked into unfavorable loan terms.
The comments above & below are edited ([ ]) and abridged (…) excerpts from the original article by Tim Lemke (WiseBread.com)
Here’s how to tell if your mortgage is too expensive.
1. You Are Having Trouble Making Ends Meet
No matter what you do, you feel like you’re struggling to get ahead financially. It always seems like there’s only a small amount leftover at the end of each month to pay bills or place into savings. It could be that your house is weighing you down. If you’re working too hard to get ahead with your money, it may be time to refinance your mortgage or move into a less expensive home.
2. It’s Eating Up More Than 30% of Your Income
The federal government advises that homeowners should avoid paying more than 30% of their income on housing. The theory behind this number is that for most people, keeping payments below this level will leave them with enough to pay for other non-discretionary spending. Keep in mind that many lenders will approve prospective homeowners for a loan even if their payments would be above that 30% threshold. Lenders will often instead refer to a person’s “debt-to-income” ratio, and will lend if that ratio is as high as 43% — and banks went even higher during the housing bubble.
Even if you are comfortably able to make your mortgage payments, it’s wise to try and get under the 30% threshold. After all, more money in your pocket means more money to take care of your other financial obligations, invest for the future, or simply enjoy life.
3. Your Interest Rate Is Higher Than Everyone Else’s
It’s very easy to get a fixed-rate mortgage, make the payments, and not concern yourself with how interest rates are going up and down. But you never want to be locked into a higher rate than necessary. If you bought your home more than a decade ago, chances are your interest rate is higher than what’s available now. The rate on a 30-year fixed rate mortgage is a little over 4% right now. If your rate is considerably higher, look to refinance and see what you can save.
4. You Are Barely Making a Dent in the Loan Principal
You’ve been making mortgage payments for years, but every time you look at your account statement, it seems like the principal balance barely budges. What gives? It’s normal to pay mostly interest when you first get a loan, but over time your money should increasingly go toward paying off principal. If you find that you’re not paying down the loan as quickly as you want, it could be because your interest rate is too high or your term is too long (or both.)
5. Your Income Has Gone Up
When you bought your house, your interest rate was based at least partially on your household income. But if you’ve received multiple pay raises since, you might qualify for a lower rate. Or, you may be able to refinance into a shorter loan term, thus saving you money in interest over time.
6. Your Credit Score Has Improved
A mortgage interest rate is also partially based on a homeowner’s credit score when they apply for a loan. If your credit score was mediocre back then, there’s a chance you got stuck with a high rate. If you’ve worked hard to be financially responsible ever since, your credit score may be much higher. Thus, you may be able to refinance your mortgage into a lower rate. According to FICO, a person with a credit score of 650 might pay as much as $100 more per month on a $200,000, 30-year fixed loan than someone with a score of 800. That could add up to tens of thousands of dollars over the course of a loan…
7. Your ARM Just Adjusted
During the housing bubble, many homeowners were lured into adjustable rate mortgages that offered low interest rates initially and then jumped after a certain number of years. (In 2005, these loans made up nearly 40% of the mortgage market.) Many families saw their payments increase sharply and beyond what they could afford. If you currently have an adjustable rate mortgage, make sure you are prepared to make payments once the interest rate adjusts upward. Otherwise, consider refinancing to a fixed mortgage with a low rate.
8. You Are Paying for Mortgage Insurance
Many lenders require borrowers to pay private mortgage insurance (PMI) if they put less than 20% down on a home. This is to protect the lender if a home ends up in foreclosure. Mortgage insurance essentially adds to your cost of homeownership, often to the tune of hundreds of dollars annually. This requirement goes away once your principal balance drops below 78%. Ideally, you want to avoid paying PMI altogether by putting more than 20% down. This also means you’re borrowing less overall and will save money in the long run. But if you can’t quite save that much up front, work aggressively toward paying off your loan so you can get rid of the PMI requirement sooner.
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