Wednesday, Jun 20, 2018
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Longer mortgages, smaller payments find advocates among money planners

When money is scarce, borrowers may benefit from turning conventional wisdom on its head and opting for a mortgage refinance over the longest possible period.

This can help lower monthly payments and free up hundreds of dollars each month for other obligations.

"If you're trying to stave off a short sale or foreclosure, extending your loan term will surely help make your mortgage payments affordable again," said Ritu Agrawal, co-founder of the Money Ladder, a personal financial advisory firm in Minneapolis.

Ms. Agrawal acknowledges some drawbacks to opting for a longer loan.

"One is that you will pay more in interest over the life of the loan," she said. "Also, if you were to sell your home after a few years, you would accumulate less equity than you would have under a 15-year or shorter-term mortgage."

But borrowers struggling to meet monthly financial obligations or facing foreclosure have far more pressing concerns than how much more they might pay or save over the life of the loan.

"Our clients who have experienced an adverse event, such as a layoff, divorce or a major medical expense, often seek to reduce their mortgage payments while they try to get their finances back on track," Ms. Agrawal said. "It's much better to have a longer-term mortgage than to risk losing your home or damaging your credit by making late payments."

Jay Dacey, a mortgage planner in the Minneapolis area, also believes it can make sense to extend the mortgage term and reduce the monthly payment.

"Let's say …you are stuck paying for a new furnace, car transmission or Junior's tuition bill," he said. "Having a 30-year term instead of 15 years lowers your monthly hurdle. You can always pay extra [from month to month], but never less."

Although many people equate being debt-free with wealth or security, Mr. Dacey said, "Just because your home is free and clear of mortgage debt doesn't mean you are wealthy. But having your assets compound and pay you dividends can build wealth."

However, not everyone will qualify for refinancing.

"You are in the driver's seat if you have a 740-plus [credit] score," Mr. Dacey said.

Borrowers in the 620 to 660 range are likely to be charged 2 percent to 3 percent more in fees or an interest rate that is 0.5 percentage point higher.

"Certain FHA lenders still fund refinances for borrowers with sub-600 credit scores, as long as the applicants meet other criteria," Mr. Dacey said.

Such criteria include having appropriate debt-to-income and loan-to-value ratios and adequate asset reserves, he said.

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