Smart refinancing options for the cash-strapped homeowner

Terence Loose
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Smart refinancing options for the cash-strapped homeowner
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Has your monthly mortgage payment become a burden?

Well, good news. There are ways for cash-challenged folks to refinance and lower their monthly payment. Whether it's a case of you owing more than you think is allowable for a good rate, or you don't have the money for up-front refinancing costs and fees, there may be a way you could still refinance and start saving. 

So before you throw up your hands and resign yourself to a future of high interest rates, read on about four ways you might be able to refinance and save money every month on your mortgage. 

HARP Might Help

If you've heard of the Home Affordable Refinance Program (HARP 2.0), but thought it was just for seriously desperate homeowners about to lose their homes to foreclosure, think again. This government program was actually designed to help responsible homeowners who got caught on the wrong side of a sliding housing market.

Specifically, the HARP program is designed to allow those who can't qualify for refinancing because their home's loan-to-value (LTV) ratio has increased to more than 80 percent.

"This simply means that the amount you owe on your mortgage is more than 80 percent of the current market value of your home," says Jim Duffy, a mortgage banker with Cole Taylor Mortgage.

If that's the case, it would normally be very difficult to impossible for you to refinance, he says. But not through the HARP program, which generally has less stringent qualifying standards, says Duffy.

There are still some eligibility requirements, however. According to the Departments of Treasury & Housing and Urban Development's "Making Home Affordable" website, requirements include:

  • Your mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae, or sold to them, before May 31, 2009.
  • Your mortgage cannot have been refinanced through HARP already (unless your loan is a Fannie Mae loan that was refinanced through HARP from March to May 2009).
  • Your current LTV ratio must be greater than 80 percent.
  • You must be current in your mortgage payments with a good payment history for the past 12 months.

Two more points are important. One, according to the Departments' website, just like any refinancing, you may contact your current mortgage servicer directly, or use another mortgage servicer approved by Fannie Mae or Freddie Mac to help you through the process. Two, these loans do still have costs and fees associated with them, just as any refinance.

[Time to refinance your mortgage? Click to compare interest rates from lenders now.]

However, says Duffy, if you have a mortgage with an interest rate that's one percent or more above the current market interest rates, HARP is worth considering.

The 40-Year Mortgage

Did you know that there are 40-year mortgages available? If you said no, you're not alone. Not many people take advantage of these, but they do exist. And, if used properly, they could lower your monthly payment.

In fact, most people who choose a 40-year mortgage do so to lower their monthly payment, says Justin Pritchard, a financial planner who writes's banking and loans column.

"By lengthening the loan's term, you lower the amount you need to pay every month to pay off the mortgage," he says.

He hastens to add that there are trade-offs. The main one is that because you're increasing the amount of time you take to pay off your loan, the more interest you'll end up paying over the life of your loan, says Pritchard.

Another is the fact that often 40-year mortgages have a slightly higher interest rate - usually about a quarter of a percent higher, he says. But if you're cash-strapped and a lower monthly payment will make a big difference in your life, this may be the way to go. Here's a comparison that gives one example, but remember that every situation is different.

Our example compares two fixed-rate mortgages of $300,000: a 30-year with the rate stated for November 21, 2013 by the "Weekly Primary Mortgage Market Survey" conducted by Freddie Mac, one of the nation's largest mortgage holders. The other is a 40-year at a rate that's .25 percent higher.

  30-Year, Fixed Rate 40-Year, Fixed Rate
Interest Rate: 4.22 percent 4.47 percent
Monthly Payment: $1,471 $1,343
Total Interest: $229,400 $344,596

15 to 30

No, that's not a prison term. But if you signed up for a 15-year mortgage in times that you may have had more cash coming in, you may be feeling a little like a prisoner to your own mortgage now.

That's because despite typically having a lower interest rate, 15-year mortgages come with a higher monthly payment than the more traditional 30-year mortgage. This is simply because you must pay off the principal in half the time.

It should be noted, however, that shorter-term mortgages are considered wealth-builders if you can afford the higher monthly payment.

"15-year mortgages save you a lot in interest over the life of the loan," says Pritchard.

[Thinking about refinancing to a shorter-term loan? Click to compare interest rates now.]

But if you can't afford the monthly payment, that might not matter - after all, that savings is worth nothing if you lose your home to foreclosure. So let's look at a comparison between a 30-year, fixed-rate mortgage and a 15-year, fixed-rate mortgage. Both will be for $300,000 and use Freddie Mac's November 21, 2013 average interest rates.

  15-Year, Fixed Rate 30-Year, Fixed Rate
Interest Rate: 3.27 percent 4.22 percent
Monthly Payment: $2,111 $1,471
Total Interest: $79,966 $229,400

Bottom Line: As you can see, while you'll pay more interest over the life of the loan, you'll also save $640 per month.

No-Cost Refinancing

Refinancing does come with some costs, aptly named closing costs. But if you don't have the cash to pay these costs, there are options still open to you.

Closing costs can include quite a smorgasbord of charges, sometimes adding up to 2 or even 3 percent of the amount you are refinancing, says Duffy. The exact amount varies, he says, because some are based on the amount of your mortgage and some are flat rates, such as application, appraisal, and title fees.

If lowering your monthly payment sounds that much more expensive now, fear not. Because Duffy says today's low interest rates allow borrowers to add the cost of refinancing into their mortgage and pay nothing up front. For example, Duffy says one option is to take a slightly higher interest rate, so the lender can use that money to pay for your closing costs. In this scenario, the amount you borrow does not go up - the fees don't get added to the principal.

This way, you pay nothing or very little out-of-pocket, but still get a great rate. He says with this option, though, expect to pay a quarter percent higher rate. "But with rates so low this can still save you a lot of money every month on your payment," Duffy says.

And hopefully, that might lessen the burden of paying your mortgage each month.