Forget Refinancing: If You're Struggling to Pay Your Mortgage, Do This

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Years back, friends of mine were struggling to keep up with homeownership costs. They'd gotten pregnant shortly after moving into their place ("a surprise, not an accident") and weren't anticipating having to cover child care costs on top of a mortgage so soon.

Thankfully, their credit was in good shape and they qualified to refinance their mortgage when rates had started to slide. That enabled them to lower their monthly payments and get a bit of relief.

But refinancing a mortgage may not be feasible these days if you find yourself in a similar boat. Generally speaking, if you're going to refinance, you should aim to shave about 1 percentage point or more off of your loan's interest rate. If you don't get at least that much in savings, it may not be worth it to pay the closing costs associated with a mortgage refinance. Also, if you're only lowering your mortgage's interest rate a little bit, a refinance isn't going to help you much.

Currently, mortgage rates are elevated, and they're likely to remain high until the Federal Reserve starts cutting interest rates. Freddie Mac puts the average rate for a 30-year mortgage at 6.78% as of this writing. If you signed a mortgage a year ago at 6.95%, a 6.78% refinance won't do you much good.

That doesn't mean you're doomed, though. Even if refinancing isn't a great solution right now, there's another option you can look into that might significantly reduce your monthly costs.

Is mortgage modification right for you?

When you refinance a mortgage, you swap your existing home loan for a brand-new one. You have to go through an application process and undergo a credit check, since you're trying to get a new loan.

If refinancing isn't in the cards right now, talking to your existing lender about mortgage modification is a good bet. With loan modification, you don't get a new mortgage. Rather, you keep your existing loan but work with your lender to change its terms.

How might a modified loan help you if you're struggling with your payments? One thing your lender can do is extend your repayment window. The more years you have to pay off your mortgage, the less you should have to pay each month. If you signed a 30-year mortgage you're having a hard time paying, you can see about stretching it to 40 years.

The downside, of course, is paying more interest and having to deal with that loan for a longer period. The upside, though, is smaller monthly payments -- and perhaps reducing or eliminating the risk of losing your home in the near term.

Don't write off mortgage refinancing completely

Though it's not currently a good time to refinance, things could change in the coming years. If you can take on a second job to keep up with your mortgage payments until interest rate conditions improve, that could be a solution, too. From there, you can look to refinance, and you might shrink your monthly payments significantly.

But if you need relief now , then it pays to talk to your lender about loan modification.

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