refinance

Refinance an uphill fight after job loss

Don Taylorq_v2.gifDear Dr. Don,
We have a second mortgage on our home that we refinanced from a 10-year to a 15-year fixed-rate loan. My husband recently lost his job and now wants to refinance the second mortgage with a 20-year loan. I would rather find a part-time job and try to make up the difference. What do you think we should do?
-- Maggie Mortgage

a_v2.gifDear Maggie,
If you qualified for the existing second mortgage with two incomes, getting approved for a refinancing with just one income will be an uphill battle. That's especially true in today's mortgage market, where lenders are very cautious about home appraisals and loan approvals.

Do a little financial forensics. Does you husband plan on going back to work? What are the job prospects in his field? Do you have an emergency fund or other sources of funds available that will allow you to keep up with the bills while he's looking? How well does the prospect of part-time work bridge the gap in your finances?

Closing costs for second mortgages are much lower than closing costs for a new first mortgage. However, taking on the expense of refinancing and extending the mortgage could add thousands to the total cost of the loan -- even if the loan is at a lower interest rate. I understand your husband is looking to make the payment more affordable, but his unemployment could be a short-term issue and refinancing is a long-term solution.

Bankrate's mortgage payment calculator will let you compare the interest expense on your existing loan with the expense on a new 20-year second mortgage. Here's an example:

Comparing interest expense
15-year20-yearDifference
Loan amount:$100,000$100,000
Loan term (months):180240
Interest rate:5.75 percent5.25 percent
Monthly payment:$830.41$673.84$156.57
Total interest:$49,473.82$61,722.60$(12,248.78)

Extending the mortgage term frees up $156 a month, but you wind up paying an additional $12,000 in interest expense over the life of the loan. This example didn't include closing costs, or any tax benefits from using the mortgage interest deduction on your income taxes. Use the calculator to construct a table that more closely matches your loan balances and interest rates.

Bankrate's content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this Web site is governed by Bankrate's Terms of Use.

To ask a question of Dr. Don, go to the "Ask the Experts" page and select one of these topics: "Financing a home," "Saving & Investing" or "Money." Read more Dr. Don columns for additional personal finance advice.

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