Getting a mortgage is a great, but huge life step. It keeps you rooted to a fixed location, and it generally indicates stability in the life of an adult.
However, while getting a mortgage loan is an important step to take towards achieving home ownership, it’s important to avoid overpaying for your mortgage through exorbitant interest rates.
With that said, we’ve put together a list of 11 signs you’re paying more on your mortgage rate than you should, but before we dive into the list, it’s important to consider the impact of a high-interest rate on your mortgage payments.
In this article:
- How Does A High-Interest Rate Impact Your Ability To Pay Off Your Home?
- Your Rate Is Significantly Higher Than The Current Market Rate
- Your Interest Is Significantly More Than Other People With Similar Credit Scores
- Your Lender Is Not Offering Discounts For Automatic Payments Or Other Incentives
- Your Loan Has A High Loan-To-Value Ratio
- Your Lender Does Not Offer Any Lender Credits Or Other Incentives To Lower Your Rate
- Your Lender Has A Reputation For Charging High Fees And/Or Interest Rates
- No Offer To Restructure Your Loan Terms
- The Loan Term You Are Offered Is Longer Than Average (E.G., 30 Years Instead Of 15 Or 20)
- Your Down Payment Was Less Than 20% Of The Home’s Value When You Took Out The Loan
- Your Lender Does Not Offer Any Type Of Discount For Paying Off The Mortgage Early
- Your Loan Includes Prepayment Penalties
- Tips For Refinancing Your Mortgage
How Does A High-Interest Rate Impact Your Ability To Pay Off Your Home?
A high mortgage interest rate can significantly impact your ability to pay off your home. It means that you’ll have to pay more money over the life of the loan, which can make it difficult to keep up with payments.
In addition to that, a higher interest rate can lead to higher monthly loan payments, making it even harder to meet your financial obligations.
Ultimately, having a high mortgage interest rate could prevent you from ever paying off your home if you are unable to keep up with the payments.
Having said that, here are some ways to know if your mortgage interest is higher than it should be.
Your Rate Is Significantly Higher Than The Current Market Rate
It’s important to compare your mortgage rate to those of other lenders to ensure that you are getting a fair deal – that’s because, If your mortgage interest rate is significantly higher than the current market rate, it could be an indication that you are paying too much for your property’s mortgage.
The average mortgage rate is determined by a variety of factors, including the economy and the type of loan you choose amongst others.
Generally speaking, the lower your credit score and/or the riskier the loan type (such as an adjustable-rate mortgage), the higher your mortgage rate will be. Other factors include your income level, down payment size, and location.
You can use Mortgage Rate Calculation Tools to uncover the average mortgage rate for your situation.
Your Interest Is Significantly More Than Other People With Similar Credit Scores
Your credit score is one of the most important factors in determining your mortgage rate.
A higher credit score will usually result in a lower interest rate, which can save you thousands of dollars over the life of your loan.
Conversely, a lower credit score may lead to a higher interest rate and a more expensive mortgage.
With credit score being such a key factor in determining your mortgage rate, if a person has a similar credit score to you, yet a lower mortgage interest rate, then it’s a sign that you’re paying more in interest than you probably should be.
Your Lender Is Not Offering Discounts For Automatic Payments Or Other Incentives
Many mortgage lenders offer discounts or other incentives when you set up automatic payments on your loan or make extra payments toward your principal balance.
However, If your lender is not offering you a discount on automatic payments, it could mean they are trying to maximize their profits or because they consider you to be a higher-risk borrower.
Higher-risk borrowers typically have higher interest rates than those who are deemed lower-risk.
Therefore, if your lender is not offering you a discount on automatic payments, it could mean that you have a higher interest rate than someone else with similar credit history and financial circumstances.
Your Loan Has A High Loan-To-Value Ratio
A high loan-to-value ratio means that there’s more of the home’s value borrowed than there is equity in it (the amount left over if all debts are paid off).
This can cause lenders to offer higher rates due to increased risk of default on the part of the borrower and may indicate that you’re paying too much for your mortgage interest rate because of this added risk factor associated with high LTV loans.
Your Lender Does Not Offer Any Lender Credits Or Other Incentives To Lower Your Rate
Lender credits can often help lower overall costs associated with borrowing funds from a bank or lending institution by reducing upfront costs such as down payment requirements and closing costs among other related fees associated with taking out a mortgage loan. This also differs from taking personal loans or borrowing to invest.
Without these credits being made available from a specific lender, it could mean they’re charging too much for their services which ultimately leads to borrowers paying an even higher mortgage interest rate than they would have if they chose a lender that offered better terms & incentives.
Your Lender Has A Reputation For Charging High Fees And/Or Interest Rates
A lender’s reputation for charging high fees and/or interest rates can be an indication that the rate you are being offered is higher than it should be.
It is important to research a potential lender to ensure that they are not taking advantage of borrowers by offering higher rates than necessary or charging excessive fees.
No Offer To Restructure Your Loan Terms
Restructuring your loan terms, such as switching from a fixed-rate mortgage to an adjustable-rate mortgage, can help you get a lower interest rate on your mortgage.
If your lender does not offer these types of options, then this could mean that they are charging you more than necessary to make up for the lack of flexibility in their loan products.
The Loan Term You Are Offered Is Longer Than Average (E.G., 30 Years Instead Of 15 Or 20)
The length of time it takes to pay off a mortgage has a direct impact on its overall cost, with longer terms typically resulting in higher payments due over time because the principal balance remains unpaid for longer periods thus leading to more total interest paid over its lifespan.
As such, a lender who offers a 30-year loan term, in a market where other lenders are only offering 15 or 20, may be charging you ridiculous interest rates and are thus offering a longer repayment period as somewhat of a smokescreen, to mask the burden of your high-interest rate.
Your Down Payment Was Less Than 20% Of The Home’s Value When You Took Out The Loan
When you make a low down payment, lenders typically charge high-interest rates to compensate themselves for the added risk that comes with small down payments.
With that said, if you make a down payment of less than 20% of the home, then your interest rate is likely higher than the market average due to your lack of what lenders would consider sufficient collateralization.
Your Lender Does Not Offer Any Type Of Discount For Paying Off The Mortgage Early
Many lenders offer discounts or other incentives when you pay off your loan early or make extra payments toward the principal balance.
If your lender isn’t offering these, then it could indicate that they are charging more than necessary and that your interest rate is higher than it should be.
Your Loan Includes Prepayment Penalties
Prepayment penalties can have a significant impact on mortgage interest rates.
Generally, lenders will charge a higher interest rate on mortgages with prepayment penalties to offset the potential loss of income if the borrower pays off their mortgage early.
Borrowers who are considering taking out a loan with a prepayment penalty should be aware that they may be paying more for their loan than those without one.
If you find that your mortgage interest is too high, you can bring it down by opting for refinancing.
Here’s a look at some steps you can take to refinance your mortgage:
Tips For Refinancing Your Mortgage
Refinancing your mortgage is incredibly easy. Mortgage solutions like loanDepot offer a slew of options for refinancing your mortgage, allowing you to save money and reduce your monthly payments.
This can help you save money over the life of the loan and make it easier to pay off your mortgage faster. Before you jump into refinancing, however, it’s important to understand the process and ensure that it’s right for you.
Step 1: Assess Your Current Mortgage Situation
Before considering refinancing, you need to take some time out to assess your current mortgage situation.
Analyze how much you’re paying in interest and other fees each month and determine whether or not refinancing could help reduce those costs.
In addition to that, it’s important to consider how long it will take for the savings from refinancing to cover any upfront costs associated with the process such as closing costs or origination fees.
Furthermore, consider how long you plan on staying in the home; if you plan on moving soon after refinancing, then it might not be worth taking on additional debt just for a short period.
Step 2: Shop Around For A Good Lender
Once you’ve determined that refinancing is right for you, start shopping around for lenders.
Here are a few things to consider while shopping for a mortgage lender:
Research the lender’s reputation by scrolling through customer reviews. Doing so will give you the best chance of getting a good experience with your lender.
Compare lenders to determine which one offers the lowest fees for closing costs and other services associated with obtaining mortgage refinancing.
Ask about current interest rates offered by different lenders to make sure you’re getting the best rate possible on your refinancing plan.
Find out how long it takes for a lender to pre-qualify you for a loan and ask questions about their underwriting process to gauge how easy or difficult it might be to get approved with them.
Make sure that the lender is offering good customer service before signing up with them, as this will be important when you have questions or need help during the loan process.
Step 3: Gather Your Financial Information
Gather all of your financial information before applying for a refinance loan so that everything is ready when applying with lenders.
Have documents such as tax returns or pay stubs handy as well as any information related to existing debts such as credit card balances or car loans for potential lenders to get an accurate picture of your finances before approving any loan applications.
You’ll also need proof of homeowners insurance since this is often required when taking out mortgages.
Step 4: Submit Applications Once Ready
When you’ve decided on a shortlist of lenders you’d like to work with, then the next step would be to submit applications to those lenders, to compare their offers side by side.
It’s worth noting that you should include all applicable information in your applications so that lenders can accurately evaluate each application without having incomplete pieces missing which may delay processing times.
Step 5: Review Offers Carefully
Once offers come back, it’s important to review them carefully. That’s because doing so helps you understand the terms and conditions of the loan, compare different lenders, and determine which lender is offering the best deal.
While you’re reviewing offers, it’s important to consider components such as the total principal amount, interest rate, refinancing term, origination fee, and a lender’s late penalty fee.
Step 6: Close the Loan
Once you’ve settled on an offer from a particular lender, the next step would be to sign the necessary documentation.
After putting pen to paper, it might make sense for you to make copies of the documents, just so you don’t run the risk of losing them.
After signing all the necessary documentation and successfully refinancing your loan, all that’ll be left to do would be to ensure you’re able to make your monthly payments.