It's not unusual for housing to be the typical American's single greatest monthly expense. In fact, there are countless homeowners out there who spend more than they can comfortably afford for a place to call their own. According to the MacArthur Foundation, from 2011 to 2014, more than 50% of Americans had to make at least one major financial sacrifice to cover a housing payment. Worse yet, in 2015, nearly 12 million households spent more than half of their income on housing.
If your mortgage payment is a source of financial stress, you may have some options for lowering it. Here are three scenarios where you could be overpaying unnecessarily.
1. You're still paying PMI when you don't have to be
If you weren't able to make a 20% down payment on your home, you probably got hit with private mortgage insurance. PMI is a means of protection for lenders, and it's paid in the form of a monthly premium that gets tacked on to your regular mortgage payment. PMI will typically equal 0.5% to 1% of your home loan's value, so if you're looking at a $400,000 mortgage with 1% PMI, you'll be paying an extra $4,000 per year.
While lenders are required to cancel PMI when your loan-to-value ratio drops to 78%, you're allowed to request that it be canceled once that ratio hits 80%, which means you have 20% equity in your home. Though you'll need to meet certain criteria, you should request that your PMI be canceled as soon as you're eligible, because doing so could save you thousands of dollars each year.
2. Your credit is better today than it was when you signed your mortgage
Though you don't need a perfect credit score to get approved for a mortgage, the higher your number, the better your chances of snagging the best possible rate. If your credit has improved since you first signed your mortgage, you might be eligible for a more favorable interest rate -- in which case it pays to look into your options for refinancing.
As a quick example, say you're applying for a 30-year, $300,000 fixed mortgage today. If your credit score is somewhere in the 760-850 range, you'll be eligible for an APR of 3.792% and an associated monthly payment of $1,397. A score in the upper 600s, however, will raise your APR to 4.191% and add $68 a month, or $816 a year, to your mortgage payments. Though you will face some closing costs as part of the refinancing process, if your score is considerably higher now than it was back in the day, it pays to run the numbers and see whether locking in a lower rate will make a huge difference in your monthly payments.
3. You can afford a larger monthly payment than your current one
Perhaps you've gotten a major salary increase or promotion, or your spouse has returned to the workforce after a multi-year break. If your household earnings today are higher than what they were back when you signed your mortgage, you might consider refinancing to a new loan with a more favorable rate and a shorter term. In other words, if you have a 30-year mortgage but can afford the larger payment associated with a 15-year loan, refinancing will help you save money in the long run.
Remember, your mortgage payments consist of both principal and interest payments. While refinancing to a loan with a shorter term will increase your principal payments, it'll also slash your lifetime interest costs so that you end up paying less for your mortgage overall.
Not only will lowering your mortgage costs free up extra cash for you to spend at your discretion, but it might also spell the difference between having the ability to save for retirement and struggling financially as a senior. In a recent Bankrate report, 37% of homeowners claimed that having a mortgage ultimately derailed their savings efforts. If you can get away with paying as little as possible for your mortgage, you'll get the best of both worlds -- a roof over your head, and the freedom that comes with having more cash at your disposal.