Help a Reader: Refinancing Question

Here's an email I recently received:

I purchased our home right at the peak of home prices.  I financed 100% so I have very little equity in the home and it would probably appraise for $10-$20k less than I owe on it.  My interest rate is over 7% (with great credit).   I've tried asking for a rate reduction but since I'm not behind on payments, they won't do it.  I could save around $300 per month at today's interest rates but it doesn't seem like I have any options.  Help!

So, what would you suggest for him?

Comments

[Chris]

It depends on what state you're in as far as walking away from the house, whether there are ramifications that follow you or not. My experience is that they won't even deal with you unless you're at least 60 to 75 days late. So it may take that to get into the rotation. This was in CA, by the way.

[AmandaD]

My co-worker was trying to do this & the loan broker told her she would need to come up with the negative equity in cash for the refi since the house would NOT appraise for the amount of their original loan. She's pretty much stuck since she can't come up with the extra $5K right now.

[Kevin M]

Suck it up and live with it (and learn from it!) - you were obviously happy with the mortgage when you bought the house.

[Jennifer]

I would hire an appraiser to give you an appraisal on the home so you will know exactly what you are looking at as far as value goes. I don're recommend loan brokers because you end up paying double for some fees, such as application fee, processing fee, etc. Next I would contact a bank or credit union and see if they still offer the 80/20 split on the house, which would be a first mortgage for 80% of the value of the home and an Equity line or 2nd mortgage for the remaining 20% of the value, which will save you from having to pay the Private Mortgage Insurance because you will have more than 80% of the value financed. If you do have great credit (usually in the 700's and above) you might still find a lender willing to finance the 100%. I would recommend First Horizon Loans, who I have my mortgage with, or perhaps a local bank that is usually more lenient than big lenders. If you can't find financing now, wait 6 months or so and try again.

[Justin]

Unless you have the cash to make up the negative equity, there's nothing you can do. Such is life when you gamble on 100% LTV... You agreed to the terms.

Also, @Jennifer... Nobody does 80-20 deals anymore. Piggyback loans are a big no-no in the lending world. Besides they are really shady, and probably the reason this whole mess started.

Umm, isn't it obvious: you can't refinance.

[Pop]

Wow, an interest rate of 7%. That's approaching loanshark rates!

When did America become a country of whining babies who sign, but don't read, contracts and feel they're entitled to hit the reset button when life "isn't fair"?

[plonkee]

Them's the breaks I'm afraid. If you don't have the money to cover the drop in equity then you can't refinance. 7% is certainly an interest rate that you want to give serious consideration to overpaying the mortgage though. The more you pay off, the quicker you'll be able to refinance.

[Miss M]

I called my lender the other day. I'd have to come up with $153,000 cash to refinance, about half of what I paid for the home! There are a few tiny slivers of hope, one did your lender keep the loan or resell it? Two if they did resell it did it go to Fannie or Freddie? Fannie and Freddie are considering no-appraisal refi's for loans they already hold, since they already assumed the risk they have a stake in keeping you in the home and current. But nothing has changed yet. From my underwater homeowners blog:

http://underwaterhomeowner.blogspot.com/2008/12/fannie-and-freddie-might-waive.html

[Jim]

It doesn't say they are struggling to pay the bill or otherwise having problems and it sounds like they would just like to try and refinance to get a better rate.

Do you have any other assets you could use to put into the home to pay down the debt?

If you don't have other money then sit on the loan you have for the time being and do your best to make the payments.

If you can get the home to the point that the loan is less than the value of the house then you might be able to refinance and come out ahead in the long term. But that is probably only worth considering if you are pretty sure you'll be in the house for many years.

Jim

[Jim]

Pop said: "Wow, an interest rate of 7%. That's approaching loanshark rates!"

In 2006 typical 30 year rates peaked around 6.7%. So I don't think 7% for a 0% down loan is too bad. Especially if they didn't pay any points.

Jim

[dogatemyfinances]

Pay it down to 80% and refinance in a couple years.

[robert]

7 Seven % on a house loan is NOT even close to LOAN SHARKing.
You only have to go back to the 70's to see real loan shark rates.
Do get a real appraisal. Cut your live style and save up the difference plus a real deposit. With money in hand, approach real banks (those that hold their loans) for a refi.

[Shorty]

Jim and Robert: Umm, I think "Pop" was being sarcastic when he said "Wow, an interest rate of 7%. That's approaching loanshark rates!"

[Mr. ToughMoneyLove]

I think this person needs to pay his stupid tax, work harder (second job?) and pay down that loan until he can refinance. While he is staying home not eating out or going on vacation, he can read some books on personal finance books so that he will understand what he did wrong and why he should never do it again.

[PZ]

2 Options, either acquire the help of a loan modification person o r 2. SHORT SALE .

[Troy]

Quit "asking" for a rate reduction and start "earning" one.

[Kevin]

If you are not in financial turmoil, I would pay it down as much as possible. There is talk about putting rates at 4.5%. I would shoot for getting the mortgage to under 80% and be ready if the rates go under 5%.

[sahm]

We are looking at a refi today, but we had a little more than 10% equity when we bought the house a little over a year ago. We've always done conventional mtgs. They won't even touch you unless you have no more than 90% LTV. Values have dropped just enough to make it a gamble that we'd even qualify. We have excellent credit(right around 800) and about the only option was an FHA. Those rates are still in the 5's and they will do a 95% LTV.

If you are looking at investment props Fannie & Freddie won't look at anything with a LTV of more than 70% LTV. We had that a little over a year ago. The value has dropped over 10% in that neighborhood, though. Oh well, as someone said, I was happy with the rate when I got it. It doesn't hurt to try to lower it, though.

I have to say it is lousy that the banks won't work with those who are current on their payments. I went to my current bank with that holds our mtg on our primary home and the bank that holds the mtg on our rental. Neither one seemed to really want to do anything. I just wish they'd quit sending me the requests to refi my property and tell me ways they can lower my rate!

[Strick]

Pretty straight forward

1 - Ask mortgage broker is you can refi. If no way then -
2 - Keep paying your mortgage
3 - Save so you can bring cash to the table.
4 - Wait for property values to go back up a little.
5 - Wait for lenders to losen up a little
6 - Hope rates don't go back up
7 - Go back to 1. It may take a while, and a $300 month savings is worth the effort, but the extra 1.5% you're paying over a good rate shouldn't exactly be a huge burden

[Bryan]

Lot of comment trolls around here.

[easychange]

Sahm had the issue spot on. There are many responsible people out there who can afford their mortgages but would like to lower their rates.

My feeling is that there should be some sort of incentive for the responsible people for people to be able to refi without getting punished for the drop in home prices around the country.

In the end, we've all got to save up if we want to refi in this environment, but I agree. It would be nice if the banks would make this easier for us, good borrowers.

[Casey]

Wow. Who are all of you people to judge?

[Steve]

These people have the right to judge, when the poster asked the question. People should not ask a question and expect all positive feedback.If someone bought a house with Zero down then they should just except whatever rate they get because they could not afford to buy in the first place.The person deserves to pay 7% because he/she is a big risk to a lender.Why would a lender let him/her re-write a loan when he/she has NOTHING invested in the property?The only thing a risk for the poster is his/her credit score when they default.

[Meg]

I can understand being frustrated with a 7% rate when right now mortgage rates are around 5%. But look on the bright side - you got a house with no money down. Steve (above) is right; you really should be paying a higher rate because you are a bigger risk. Nobody is going to refinance a loan that exceeds (or even approaches) the value of the house. The only people getting 5% mortgages right now are those with great credit, steady incomes, and who have 20% equity or higher in their homes.

[mike]

Be happy with your 7%! I have two with 9.5%

[Mike]

To everyone with the "you should have read the small print" attitude, Do you really think we expected our ARM to adjust this high?!