Re-Re-Refinance?

QUESTION:

I'm self-employed and got a stated-income, no-documentation, 30-year loan in 2006. Times were good so I refinanced into a 15-year fixed-rate mortgage. Things were still going great and I refinanced into a 10-year fixed. Then came the recession, and I've been struggling to make my $5,000 monthly payment. I tried to refinance back to a 30-year term and I tried a loan modification and was turned down for both. My credit score took a hit during the recession, and I would like to retire next year. What can I do?

ANSWER:

There are distinct financial advantages to loans with shorter terms. The overall interest cost for the loan is lower than with a 30-year product. However, by compacting the loan term the required monthly payments can get much larger. Example: A $200,000 mortgage at 4 percent costs $955 per month for principal and interest over 30 years. Over 10 years, the same loan requires a monthly payment of $2,025.

Rather than a short-term loan, the better option is to get a 30-year mortgage with the right to prepay in whole or in part at any time and without penalty. This is the arrangement with FHA, VA and conventional mortgages. With such loans only the basic 30-year payment is required, however larger monthly payments are allowed. This means you can effectively create your own 15-year or 10-year loan - and also stop the prepayments if times get tough. (Note that the interest rates for shorter term loan will be lower than a 30-year mortgage, but payment flexibility trumps that issue, in my view.)

Keep making payments to maintain your credit. To refinance, try a local credit union or community bank. They may understand that part of the reason your credit score is down is because you're making huge monthly mortgage payments, a correctable problem. Also, look at a loan modification again because some new guidelines that recently have been announced may help you.