Reasons your mortgage is so high

Is your mortgage costing you a lot of money? Check out these four reasons why it might be time to refinance.

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Have you heard about refinancing, but think it's too much of a hassle to pursue? We understand. Life is busy. And who has time for more paperwork?

But ask yourself this: Do you have time to save money? Because if you qualify, refinancing your mortgage could be a smart financial move.

That's because refinancing replaces your existing mortgage with a new one that has more favorable terms. And those terms could lead to a lower interest rate, a shorter loan term, or a lower monthly payment.

Of course, you'll want to keep in mind that refinancing does cost money. In fact, a good rule of thumb is that a mortgage will cost about three percent of your home's value, according to the Federal Reserve Board website - the main governing body of the Federal Reserve System, which oversees national monetary policy and the banks.

Fortunately, this cost can be built into the refinanced loan, and the result could still save you money.

[Think refinancing is right for you? Click to compare rates from multiple lenders now.]

To learn more, check out the following ways you could be losing money by not refinancing.

#1: Paying a Higher Interest Rate than Necessary

Think you have a good mortgage interest rate? You might. But with today's historically low rates, refinancing could still be a smart move - one that could save you money every month.

The amount you'll save depends on your loan's terms and rate, but since your home is possibly the biggest purchase of your entire life, refinancing is worth consideration.

To start, consider that a 30-year fixed rate stood at 3.52 percent as of Sept. 18, 2012, according to Mortgage News Daily, an organization that provides housing news and analysis.

So, let's say, for sake of illustration, you have a 30-year fixed mortgage with a rate of 5 percent. Historically speaking, that's pretty good. But check out how things change if you refinanced to the 3.52 percent rate.

[Click to shop around and compare rates from multiple lenders now.]

Here is an example that uses a $300,000 mortgage amount:

  Mortgage with 5 Percent Rate Mortgage with 3.52 Percent Rate
Monthly Payment $1,610.46 $1,350.49
Total Payments after 30 Years $579,767.35 $486,174.80
Total Interest after 30 Years $279,767.35 $186,174.80

Crunch those numbers, and it adds up to a $259.97 reduction in your monthly payment. But even more impressively, after 30 years, you save $93,592.55 in interest.

That's a lot of luxury cruises or rounds of golf, my friends.

#2: Keeping an Adjustable Rate Mortgage

Adjustable rate mortgages (ARMs) might seem dreamy at first, but often the dream turns into a biannual nightmare once the interest rate begins to adjust.

To find out why, let's back up and rundown the typical terms that give these loans their name.

According to the Federal Reserve Board's "The Consumer Handbook on Adjustable-Rate Mortgages," an ARM's interest rate changes periodically, and therefore your monthly payments and interest may go up or down. On the other hand, the interest rate on a fixed rate mortgage (FRM) stays the same for the life of the loan.

Of course, with historically low rates, ARMs pose no threat to most people. But remember, your loan is likely a 30-year commitment so you might want to plan a few years or more out.

So where might rates go in the future? They'll likely be going up, according to Chris L. Boulter, president of Val-Chris Investments, Inc., a California company specializing in residential and commercial loans.

"Today's rates are almost unprecedented, so if someone has the ability to qualify [for a fixed-rate mortgage], they should take advantage of it now," says Boulter. "Because I would anticipate that rates will be going up next year."

[Looking to switch to a fixed rate mortgage? Click to compare rates now.]

#3: Sticking with a 30-Year Mortgage Term

Are you under the impression that a 30-year mortgage is your only choice? Not true. In fact, you have options that could save you money.

For example, according to Boulter, the most common option is a 15-year mortgage. In this case, if you cut your term in half, you could enjoy more savings than you might expect.

But before we get into the specifics, it's important to make sure you can handle higher monthly payments. Why? Because with this option, you'll be paying the principle (the amount you borrowed) off in half the time - or paying more of it per month.

Now get ready for the good news. First, a 15-year mortgage is typically going to have a lower interest rate than a 30-year mortgage, says Boulter. Add to that the fact that you pay it off sooner - thus decreasing the amount of time the interest has to accumulate - and you're talking some serious savings.

[Want to change the terms of your loan? Click to compare rates now.]

Here's another example, using a $300,000 mortgage amount and interest rates as of Sept. 18, 2012, per Mortgage News Daily:

  30-Year Fixed Rate Mortgage 15-Year Fixed Rate Mortgage
Interest Rate 3.52 percent 2.85 percent
Monthly Payment $1,350.49 $2,050.17
Total of All Payments at Loan Payoff $486,174.80 $369,030.79
Total Interest Paid $186,174.80 $69,030.79

Bottom Line: If you went for a 15-year loan in the above scenario, you would save $117,144.01 in interest over the life of the loan.

So if you can afford the extra $699.68 per month, you might thank yourself in a short 15 years.

#4: Not Consolidating Your First and Second Mortgage

Did you take out a second mortgage? Maybe you wanted to add a new room or pay off some credit card debt. Whatever the reason, if you now have the ability to qualify for refinancing, consider consolidating those two loans to save some money.

Why? Because chances are you took out those two mortgages at different times, which means they likely have different interest rates.

Luckily, with today's historically low rates, Boulter says you can refinance and save money by "bundling" both mortgages into one loan. By doing this, you'll hopefully score one lower overall interest rate, which should save you money over the life of the loan.

But keep in mind that all situations are unique, with different variables leading to the need for two mortgages. Therefore, Boulter advises to first look at your circumstances to ensure that refinancing makes financial sense.

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