Wondering why your mortgage rate is so high? It could be a direct effect of what you are -- or aren't -- doing.
Don't pay your bills on time?
Rarely keep track of your mortgage payments?
If you answered yes to any of the above questions, your sky-high mortgage rate could be caused by ... you.
That's right, even your personal shopping habits could play a role in how high your mortgage rate is.
But don't despair; there are some actions you can take to potentially help you lower your rate, says Fred Arnold, director of the National Association of Mortgage Brokers.
Keep reading to learn more about reasons why your mortgage rate is so high, and tips to fix it.
Reason 1: You Didn't Shop Around
Unless you're a billionaire, you probably value a good deal. And if you want a stellar bargain on your mortgage rate, shopping around is essential.
In fact, you'll probably want to put your shopping shoes on once you hear this bit of news: failing to shop around -- and not researching the rates of different providers -- could be a reason your mortgage rate is so high.
"A mortgage -- whether it's a home purchase, a refinancing, or a home equity loan -- is a product, just like a car," so you may have the option to bargain with your lender for a better rate, notes the website of The Federal Reserve, the central banking system of the United States.
"Shopping, comparing, and negotiating may save you thousands of dollars," says the website.
Fix-it tip: Compare rates for every company you shop around with, and see who offers the best rate. But that's not all. Arnold says you have to trust your lender, too.
"Shop online to get an idea of average rates, but get quotes from people who are local - people who you can walk into their office and see who they are," says Arnold. "You'll also want to get referrals from someone you can trust."
Reason 2: You Have a Bad Credit Score, And You're Not Doing Anything About It
Unfortunately, having a bad credit score tends to make life harder than it has to be. On top of potentially affecting things like insurance premiums and security deposits, a poor credit score can also affect your mortgage rate.
Why? Because many mortgage lenders view your credit score as a reflection of your financial habits.
Luckily, it's not the only thing used to determine your mortgage.
In fact, "a good credit score is only one of the factors that home lenders look at when deciding whether to lend you money," according to the Consumer Financial Protection Bureau website.
"Just because you have a good credit score does not mean that the lender is going to give you the lowest cost mortgage loan available," adds the bureau, which notes that your debt, income, assets, and savings are other notable factors that a lender may consider when determining mortgage rates.
Fix-it tip: Don't let your bad credit score hold you back from a potentially lower mortgage rate. Take action to help improve your credit, suggests Arnold.
"One way to improve your credit would be to resolve any collections in a favorable manner," says Arnold. "Try to pay down your debt to 50 percent."
Reason 3: You Didn't Refinance
What's another reason that may be contributing to your high mortgage rate? The fact that you haven't refinanced.
Refinancing: It's a term you've probably heard of, but do you know what it means?
If you answered "no," don't sweat it. Refinancing your mortgage is simply the restructuring of your current mortgage, oftentimes at a lower interest rate and different loan terms.
And as you might imagine, refinancing your mortgage could help ease your purse strings.
According to Massachusetts' Citizen Information Service website: There are several reasons to refinance your home, including the potential "to lower the interest rate on your mortgage; reducing your monthly payments and overall costs."
It also notes, though, that refinancing may not be for everyone, as the refinancing costs may outweigh the savings.
Fix-it tip: To help you figure out if refinancing is the right move for you, you'll want to ask yourself some questions. Massachusetts' Citizen Information Service recommends the following:
- How much can I lower my current monthly payment?
- How long do I plan to stay in the house after I refinance?
- How much will I pay in refinancing costs?
Figuring out the answers to these questions will help you determine if refinancing could help you save money.
Reason 4: You Have a Long-Term Loan
Are you familiar with the phrase "The sooner you get it over with, the better"? Well, that expression rings especially true when it comes to paying off your mortgage.
Why? Because when you're able to pay off your mortgage sooner, it's likely that the interest rate on your mortgage will take a dip -- and then some.
"Shorter-term mortgages -- for example, a 15-year mortgage instead of a 30-year mortgage -- generally have lower interest rates," the Federal Reserve website says. "Plus, you pay off your loan sooner, further reducing your total interest costs."
As an example of the potential savings a short-term mortgage can yield, the Federal Reserve Board suggests comparing the total interest accrued for a fixed-rate loan of $200,000 at 6 percent for 30 years, with a fixed-rate loan at 5.5 percent for 15 years:
|Loan Length||Percent Rate||Monthly Payment||Total Interest|
If you need a little help with the math, that's a savings amount of $137,520.
Fix-it tip: Of course, this is only an option if you -- and your back account -- can afford to make higher monthly payments and in effect, pay more of your principal each month. So, you'll want to take a look at your finances and determine how much you can afford to cough up each month. Though you may have to make some sacrifices, it could potentially pay off in the long run.
Reason 5: You Didn't Get Rid of Your Private Mortgage Insurance (PMI)
It sucks to be punished for not having enough money, but unfortunately, it happens.
Case in point: If you were unable to put a 20 percent down payment on your home, you were probably charged a private mortgage insurance (PMI), which protects your lender in the event you default on your loan, notes the Federal Trade Commission's website.
Thankfully, "For home mortgages signed on or after July 29, 1999, your PMI must -- with certain exceptions -- be terminated automatically when you reach 22 percent equity in your home based on the original property value, if your mortgage payments are current," says the FTC.
But did you know that you're actually eligible to get rid of your PMI once you've reached 20 percent equity in your home?
Indeed you can. But there's a catch. Your PMI can only be canceled at 20 percent equity if you request it. Otherwise, you'll be paying it until the 22 percent mark.
Fix-it tip: Pay attention to your payments and balance. Once you notice that your balance is at 79.9 percent of your home value, pick up your cell phone, contact your lender, and tell them to kick your PMI to the curb.