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Refinance or restructure our mortgage?

July 25, 2014

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

restructure our mortgage

Q: Our refinancing options are limited because we do not have much equity in our home, but we are negotiating with our current lender to re-work our loan, which is a relief because we've really been struggling to keep up with the payments. We are about seven years into a 30-year mortgage, and the lender has given us a couple of options: either start a new 30-year mortgage at a lower interest rate, or spread the payments out even more with a 40-year repayment period. The problem is, with that second option the interest rate isn't as low. Which is better?

A: The following are some things you should factor into your decision, though to a large extent, the first item is the most decisive:

  1. The affordability of your new monthly payment. Since this is your motivation for these negotiations in the first place, it is not worth starting a new 30-year loan if the payments do not fit into your budget. However, between the fact that refinance rates should be significantly lower than mortgage rates were seven years ago, and the benefit of spreading your remaining principal out over another 30 years instead of the 23 years remaining on your mortgage, it seems there is a good chance that refinancing into a 30-year loan could do the trick.
  2. The opportunity in current mortgage rates. Whatever decision you make, you need to make sure it is one you can live with, because a better opportunity to refinance may never present itself. Current mortgage rates are still among the lowest in history, and even lower than they were a year ago.
  3. Total interest over the life of your loan. Use a mortgage amortization calculator to compute how much total interest you would pay under the 30-year and 40-year scenarios. Between the longer repayment period and the higher interest rate of the 40-year option, you might be shocked at how much more expensive that solution would be in the long run.
  4. Your age and future plans. If you view yourself as staying in that house for decades, you might actually want to opt for the shorter loan, so you can foresee a time when the mortgage is paid off. On the other hand, if you plan to move in a few years, you might want to choose the longer loan so you pay as little as possible into the house before you leave.

If lengthening your repayment period out to 40 years is the only way you can afford the monthly payments, then that is probably your only viable option. However, if refinancing into a new 30-year loan makes those payments affordable, then most of the other factors line up on the side of a shorter loan.

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