Q: I've had nothing but bad luck with my mortgage. I got a 30-year loan in early 2009 at around 5 percent. Within a couple years, rates were below 4 percent; but by then, I'd had a dispute with a credit card company and couldn't refinance because of bad credit. Now that dispute is cleared up, but mortgage rates are up around 4.5 percent and I'm not sure it would be worth refinancing. The thing is, I could really use a break -- I'm barely affording my monthly payments, and I'm afraid I'll run into more credit trouble if I don't do something.
A: The important thing to keep in mind is that refinancing can not only change your interest rate, but it can change the structure of your loan -- usually by altering the time period you have left for repayment. For example, in your case, you've been paying off your loan for a little over four years now. At a fixed 5 percent interest rate, you must have paid down some principal by now, leaving you with a smaller balance than your original loan, with just under 26 years more to pay. If you refinance to a new 30-year loan, that smaller balance would be stretched over a longer repayment period, resulting in a lower monthly payment.
The place for you to start is with the amortization schedule for your original loan, so you can see what your remaining principal balance is. Then run that principal balance through a refinance calculator, comparing your current loan with a new 30-year loan. Chances are good that between slightly lower interest rates and a longer repayment term, the result will show a lower monthly payment.
The one drawback of lengthening your repayment period is that it probably means paying more interest in total over the life of the loan. However, if it makes the difference between meeting your monthly payments or not, it is probably well worth it.