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I'm Irate About My Rate

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Posted On: 10/13/2010

QUESTION:

I've been attempting to modify my current mortgage (7.25 percent over 15 years) but the lender refuses, saying my income is too high (18 percent of my income goes toward housing costs) to be eligible for federal help. At the same time, I applied for new financing with them but was denied due to a poor credit rating (I have a lot of credit card debt, through which I'm currently going through a settlement process). What's my next step?

ANSWER:

The real problem is the current mortgage. It's a 15-year loan, rather than a 30-year mortgage. That makes a big difference in terms of monthly costs. For instance, a $200,000 mortgage at 7.5 percent costs $1,854 per month for principal and interest. The same loan over 30 years costs $1,398. If refinanced at the same rate you would save $456 per month; you'd just be getting a longer term loan. That's money you could be using to pay off credit card debt, and right now it's what you need.

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The current lender likes the situation because it has a mortgage with an interest level far above the 4.5 percent or so that's now available - and it's getting paid. (A $200,000 loan at 4.5 percent over 30 years would cost $1,013 per month.) The federal modification program - Making Home Affordable - would try to get the payment down to 31 percent of your income, but you're way past that already.

Ask the lender to modify your loan to 30 years at the current rate. If that doesn't work, try community banks and credit unions. Tell them you will use 75 percent of your monthly mortgage savings to repay credit card debt. When the credit cards are paid then use the monthly savings to prepay the mortgage. It's possible that the new financing can then be repaid in a shorter time, perhaps 15 years or even less.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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