Q: I am 4.5 years into a 15-year mortgage that is fixed at 5.875 percent. My remaining balance is around $63,000 and my house is worth about $220,000.

This fall I will have two children in college and though I am in no danger of not being able to make my mortgage payment, money is very tight. I would love to be able to free up $100 to $150 a month but I don’t want to extend my mortgage length beyond the current 10.5 years that are left because I am 53 years old and don’t want to be paying a mortgage when I’m on into my 60s.

It seems that lenders aren’t eager to do mortgage refinancing for that small an amount of money. I’ve also wondered if the amount of interest I’m paying is so low (relative to larger loans with longer terms) that lowering my interest rate won’t help me as much as it would other people.

Do you have any solutions for me that would reduce my current monthly payment of about $690 in principal and interest plus about $200 taxes and insurance?

A: The bad news is there’s no way you’re going to free up $100 to $200 per month because of the length of your loan and the amount of interest you’re actually paying.

If you refinance today for the remaining mortgage balance of $63,000 at 4.5 percent for 10 years, your monthly payment will only drop to $653, a savings of $37 per month. If it costs you $3,000 to refinance, it will take 81 months (6.7 years) for you to just break even on the refinance. That would leave you just 3.5 years to enjoy the savings. It hardly seems worth the time.

Now, let’s talk about why you wouldn’t see much benefit from refinancing. First, if when you obtained your current loan you traded your 30-year mortgage for a 15-year loan, you cut out a huge chunk of interest you would have otherwise paid during the past four years. That was the big pot of savings right there, and you were smart to do it.

When you have a 15-year loan, much more of your monthly payment is principal. In fact, in the first year of an $82,000 15-year loan at 5.875 percent, your monthly payments of $686 include $285 in principal payments, a third of what you’re paying. Five years in, your payment of $686 is roughly half principal, half interest. That’s why at 5 years in, you’ve already paid down a significant chunk of the balance.

I don’t see you winning by refinancing your remaining loan balance, unless you can do it for no cost and you can start saving right away. The trouble is, almost no lenders are doing no-cost loans at the moment.

The real way for you to win is by prepaying your mortgage, which might allow you to pay it off in 8 years instead of 10. But if cash is tight, you won’t want to do that.

Other than taking a second job (and maybe you already have one), or starting a small business from home to bring in a little more income and reducing discretionary expenditures, the only other thing you can do is try to have your kids take on more school loans, freeing up income for you now. Once your house is paid off, you’ll be in a better position to help them pay off those loans – if that’s what you want to do.

One more thought: You might want to check to see if you can get a lower rate on your homeowners insurance. If you haven’t shopped for homeowners insurance for a while you might be surprised that you might be able to save some money there. Also, as real estate prices have dropped in most communities, you might want to appeal your real estate tax assessment. If you succeed by reducing your insurance costs and your real estate taxes, you might get some of that benefit you were looking for. You might even try to combine your homeowners insurance with your auto policy to see if you can get some additional savings.

April 30, 2009