Refinancing is often presented as a great option for homeowners, even if they’re not having trouble making mortgage payments. And, in some cases, it’s a good financial move. But, there are downsides, as well. And, those downsides may be of particular concern to someone who is considering refinancing because they can’t keep up with mortgage payments.
Table of Contents
How Can Refinancing Help Get Mortgage Payments Back on Track?
The key ways refinancing could help you better manage mortgage payments moving forward include:
- Rolling in past-due amounts so you can start fresh with a single monthly payment you can make on time
- Lowering your monthly mortgage payments
Catching Up Past-Due Payments by Refinancing
Refinancing may look like a good option if you’ve fallen behind on your mortgage payments and can’t get caught up, even though you have enough income to make your regular monthly payments. But, there are pitfalls.
The first stems directly from the fact that you’re behind on your mortgage payments. If the delinquency is significant enough that you’re considering a refinance to catch up, chances are that delinquency has already impacted your credit score.
That means you may have trouble refinancing. And, if you are able to refinance, you may pay higher fees and interest–the interest rate you’re offered might be even higher than your current rate. In this situation, other options might be more beneficial.
For example, you might look into pursuing a modification of your current mortgage loan, or consider Chapter 13 bankruptcy. In Chapter 13, homeowners can often catch up past-due mortgage balances over three to five years, with no risk of foreclosure based on that past-due balance.
Lowering Monthly Mortgage Payments
A refinance can lower your mortgage payments in two ways: by lowering your interest rate, or by stretching out your payments over a longer period of time. Making a good decision about refinancing to lower your monthly requirements means gathering information about the rates available to you and associated fees and then crunching numbers. It’s important to look at more than just the monthly payment.
Consider these two scenarios.
Refinancing a Recent Purchase with a Good Interest Rate
Bob bought a home in Los Angeles County in 2016. He had a large down payment from the sale of a prior home and finances $325,000 at the average interest rate at the time: 3.65%.
In 2022, he was having trouble making mortgage payments and wanted to find out whether refinancing would be a good option for him. He learns that he would be able to get a mortgage at the current average interest rate of 4.12%–higher than his original interest rate. But, he’d be stretching out payments across 30 years instead of the 24 years remaining on his current mortgage, so his monthly payments would drop somewhat.
The difference isn’t significant, though, because the outstanding balance is still $285,000, the interest rate is higher, and the difference in loan terms is relatively small. Bob’s payment would drop from about $1487/month to about $1380/month–a difference of just over $100.
An expert tip from Barry
That small drop may not make much difference to Bob’s monthly budget. But, it will make a difference in the amount he pays in the long run. The total interest cost of Bob’s original mortgage if he continues and pays it off on schedule will be about $210,000. If he refinances, he’ll pay about $211,000 on the new loan in addition to the roughly $67,000 he’s already paid in interest on the old loan.
In short, he’ll lower his monthly payment by about $100, but increase his total cost by about $68,000–not including any fees associated with the refinance.
Refinancing an Older Purchase with a High Interest Rate
Ilsa bought a home in Orange County in 2000 with a small down payment and financed $325,000. Since she took out her original mortgage loan in 2000, her rate was high: 8%. She made mortgage payments of about $2,385/month for 22 years, until she experienced an unexpected drop in income.
She looks into refinancing and discovers that current interest rates are much lower. However, her credit has suffered a little since the drop in income, so the best rate she can qualify for is 5%.
Her outstanding loan balance is about $168,000, and she learns that if she refinances for 30 years at 5%, her monthly payments will drop to just over $900/month. That’s a dramatic difference that would allow Ilsa to manage her monthly mortgage payments easily. But, it comes at a cost. Ilsa had just eight years of payments left, and she’s considering taking on a new 30-year mortgage. In the long-run, that will cost her nearly $100,000 in extra interest.
In Ilsa’s situation, it may be worth paying the additional interest to dramatically lower her monthly payments and keep her house. But, she has another option that may serve her even better: refinancing at 5% for 15 years would lower her monthly payments to just over $1,300–a savings of $1,000/month compared with her current mortgage. She would be extending her loan by seven years instead of 22, and her total interest payments across both loans would only be about $11,000 more than if she’d stuck with the original loan.
As you can see, the wisdom of refinancing varies significantly depending on issues like your current interest rate, the interest rate available, your outstanding balance, and how long you have left to pay on your loan. It’s critical that you dig in deep and make sure you understand all of the costs and benefits before making a decision.
Talk to a Los Angeles Debt Resolution Attorney
If you’re struggling financially and looking for the best way to protect your home or other assets, take advantage of a free consultation with an experienced debt resolution attorney before you make any decisions. The more you know, the better prepared you’ll be to make the best decision for you and your family.