Dear Dr. Don,

I’m a 56-year-old teacher in need of some financial advice. I bought a condo four years ago for $110,000 and financed the purchase with a 30-year fixed-rate mortgage at 4.75 percent. My monthly payments are $587. Should I refinance for a lower interest rate? I understand I will have to pay closing costs that may be tacked onto my mortgage amount. Currently I owe $83,000. I hate to see that amount go back up, but I would love to have lower monthly payments. I have lots of medical bills and I’m struggling to make ends meet. What should I do?

Thank you so much,

— Laura Lengthen

Dear Laura,

Before you refinance, you need to figure out what your condo is currently worth. A conventional mortgage lender will only lend you 80 percent of the home’s appraised value without requiring private mortgage insurance. You owe $83,000. If we assume closing costs of $4,000, then you’d want an $87,000 loan. That means your condo has to appraise for at least $108,750 to avoid PMI with a conventional refinance.

If that’s not realistic, you may have the option to refinance under the Home Affordable Refinance Program or with Federal Housing Administration financing. If your existing loan has private mortgage insurance, you will need the same amount of insurance coverage for a refinance under HARP. If your existing loan does not have private mortgage insurance, it will not be required as part of a refinance under HARP. FHA loans include a mortgage insurance premium, which is paid at closing and over the life of the loan.

Since you’re struggling to make ends meet with your medical bills, I won’t suggest refinancing with a 15-year fixed-rate mortgage. While that would reduce your total interest expense, it won’t reduce your monthly payment. Instead, you should consider refinancing with a new 30-year fixed-rate mortgage. You can use Bankrate’s refinancing calculator to calculate your monthly payment and total interest expense. I’ve shown an approximation of the payments in the table below, based on Bankrate’s mortgage calculator.

Should you refinance your mortgage?

New mortgage w/o financing closing costs New mortgage financing closing costs Difference
Loan amount: $83,000 $87,000 $+4,000
Interest rate: 3.6% 3.6%
Loan term (months): 360 360
Loan payment: $377.36 $395.54 $18.18
Total interest expense: $52,848.03 $55,394.92 $2,546.89

PMI or a mortgage insurance premium would add to the costs of refinancing. Extending your loan back out to 30 years has you paying off the note at age 86. I’d suggest that once you get your medical bills paid off, you consider making additional principal payments on your mortgage to reduce the total interest expense and shorten the life of the loan.

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