Five tips for people who can't pay their mortgage

Are you struggling to make your monthly mortgage payments? If you're in a little over your head and need help making ends meet, we have some good news: you may have more options than you think when it comes to lowering your monthly mortgage payment.

One biggie is refinancing to change the terms of your mortgage.

"It's a good time to refinance for many people because they could save a lot in interest costs due to the current low interest rates," says Justin Pritchard, a financial planner who writes the's banking and loans column.

Of course, there are also various ways to refinance, since everyone's mortgage and personal circumstances are unique.

That's why we came up with various solutions to help you lower your monthly mortgage payment and put more cash in your hands, rather than your lender's.

#1: Lengthen Your Mortgage Term

Did you get a 15-year mortgage when you bought your home? Are you now having trouble keeping up with the monthly payments? One solution to help lower your monthly payments is to refinance to a 30-year fixed-rate mortgage.

How will this lower your payments? "Because you're paying off the same principal over a longer period of time, your monthly payments are lower," says Elizabeth Weintraub, who has 30 years of experience as a realtor and writes about real estate for

However, she adds that this benefit does come with a price. Because a 30-year mortgage is paid off over a longer period of time, you will end up paying much more in interest over the life of the loan.

Now, let's see an example of how the monthly payments would change on a mortgage of $300,000 with different lengths. We'll use the current interest rates for 15 and 30-year fixed-rate mortgages as of November 21, 2012, according to Freddie Mac, an institution established by Congress in 1970 to provide liquidity, stability, and affordability to the nation's residential mortgage markets.

 15-Year Mortgage30-Year Mortgage
Loan Amount: $300,000 $300,000
Interest Rate: 2.63 percent 3.31 percent
Monthly Payment: $2,018.78 $1,315.52

Conclusion: As you can see, despite the 15-year mortgage having a lower interest rate, having a 30-year mortgage for the same amount results in a monthly payment that's $703.26 lower. That could ease some financial pain.

#2: Refinance to a Lower Interest Rate

There's a good reason most of the chatter surrounding refinancing is about today's historically low interest rates: it's the single most important thing there is when it comes to the lifetime cost of your mortgage, says Pritchard.

This means that if you're having trouble making ends meet, refinancing your mortgage to a lower interest rate could provide some much-needed relief.

"If you lower your interest rate you probably lower your monthly payment, because the interest rate is a big part of your monthly payment calculation," says Pritchard. "So refinancing could really help out with your cash flow situation."

Here's an example of how lowering your interest rate by just 1.5 percent can change your monthly payment. Again, we'll use two $300,000 fixed-rate loans. One at 5.0 percent; one at 3.5 percent.

 Existing MortgageNew Mortgage
Loan Amount: $300,000 $300,000
Interest Rate: 5.0 percent 3.5 percent
Monthly Payment: $1,610.46 $1,347.13

Conclusion: While every situation is unique, as you can see, a small percentage change in interest rate can make a significant difference each month in your mortgage payment. In our case, a 1.5 percent drop in interest rate resulted in a $263.33 savings every month. That's more than $3,000 of relief a year.

Pritchard cautions, however, if you have been paying off a mortgage for many years, make sure lowering your monthly payment by starting a new mortgage is worth it since it might impact your long-term goals negatively.

#3: Say Goodbye to Your Private Mortgage Insurance (PMI)

When you bought your home, did you make a down payment of less than 20 percent of the purchase price? If you did, you are likely paying private mortgage insurance (PMI), and getting rid of it could lower your monthly mortgage payment.

First, let's examine what PMI is. This is an insurance policy that protects the lender in case you stop paying your mortgage payments and default on your loan. Lenders usually require you to pay PMI when your equity (the difference between the purchase price of your home and the mortgage amount) is below 20 percent, according to a mortgage settlement guide published by the Federal Reserve, which oversees national monetary policy and banks.

The Federal Reserve adds that PMI can cost anywhere from 0.5 to 1.5 percent of the borrowed amount.

Now for the good news: You can get rid of PMI once you attain 20 percent equity in your home, based on the original purchase price, says the Federal Reserve. To cancel PMI, all you need to do is request it to be cancelled in writing. Regardless, when you reach 22 percent, the Federal Reserve says that federal law demands your PMI payments automatically stop - if your monthly payments are up to date.

Conclusion: If you qualify, getting rid of your PMI is a must-do. Don't wait until you build up 22 percent equity. If you're at 20 percent or more now, write that letter. It could save you a bundle.

#4: Ask for a Loan Modification

It never hurts to ask for something. Isn't that what mom always said? And if you're having trouble keeping up your mortgage payments, one alternative to refinancing could be to ask your current lender for a loan modification.

And just what is a loan modification? It's a change in your current mortgage terms, agreed to by your lender, to make it easier for you to make your monthly payments.

"It could change your interest rate. It could change your payments. It could change how often your payments are made. But you still owe all that money," she says. In other words, it usually doesn't change the lifetime terms of your mortgage. It merely changes the way you pay it off.

Pritchard agrees, noting that your lender may find a way to lower your monthly payments for a limited time. However, it's highly likely that you'll have to make up the difference later, he says.

"But if you've hit a rough spot today, it can be helpful until you can get back on your feet," says Pritchard.

Conclusion: Since it doesn't cost anything to ask for a loan modification, you may as well try. To do this, call your lender. But don't get your hopes up and remember that you may still have the option of refinancing to improve your mortgage terms.

#5: Get a Cash-Out Refinance

Perhaps your problem isn't that your monthly payments are out of hand but that you need cash for some other important life event: a son or daughter starting college, medical bills, or even to pay off some high-interest credit card debt. Getting a cash-out refinance could give you an infusion of money just when you need it most.

Never heard of a cash-out refinancing? Well, it's essentially the process of refinancing for an amount greater than what you owe on your home, and receiving the difference in a cash payment.

Sounds like a great way to get an influx of cash, right? Yes, it is, but it's an option that should be very carefully considered, because when you do a cash-out refinance, you own less of your home, says the Federal Reserve.

It's also good to note that there are many requirements to qualifying for this type of loan, and they vary by lender and borrower, according to Freddie Mac.

Conclusion: If you are considering a cash-out refinance, seek professional advice. And at a minimum, make sure the reason you're converting equity in your home for cash is well worth it.

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Bob Young

Bob Young

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