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November 12, 2009

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If they are upside down in their mortgage, is it even an option to refinance unless they qualify for one of the special programs? Even if it was possible to refinance, I guess it would depend upon how long they intend to stay there. Any more than a year or two, I'd definitely say it's worth their while to refinance. 8.62% is extremely high right now (at least in my area). Right now 30 year mortgages in my geographic area are going for around 5-5.25%. That could be a big reduction in payments.

From how I understand they likely can't refinance. The special programs only apply if you are behind in your payments. And a regular refinance is only available if you aren't underwater. Unfortunately you would be better off if you didn't pay your mortgage!

I agree with Jennifer. If they can refinance, they definitely should.

According to the amortization calculator I used at www.hsh.com, a $104,000 27 year loan at 8.62% has a monthly payment of $828.57 (around $730-750 in interest alone every month for the next couple of years at least) and the total overall interest of $164,456.

BUT, a $104,000 27 year loan at 6% has a monthly payment of $648.94 (around $500-525 in interest each month). Total interest of $106,258.

They would have a monthly savings of about $180.

Then they just need to divide the closing costs by $180 (or whatever the difference is based on the refinanced rate). That equals the minimum number of months they would need to stay in the house to recoup the closing costs.

With the info above and assuming closing costs of $3500 (which was what I was quoted recently), that means they would only need to stay in the house for about 20 months to recoup the costs and the rest is gravy.

Reader, are you staying for at least a couple of more years?

They may qualify for refinancing under the government Making Homes Affordable program. I'd check into that. Info is at : http://makinghomeaffordable.gov If they can refinance then I think its definitely worth it assuming they can get a rate in the 5% level. They'd be saving about $3000 a year in interest which should probably repay refinance costs in a year or less.

Another option would be to put extra money into the loan out of pocket. But that would require them to have cash on hand that they can put into the loan to get it above water.

They probably can't refinance just to save money, unless they are truly financially distressed. If they have other liquid assets, the banks won't go for it unless they stop making payments and risk foreclosure, forebearance, or a short-sale, all of which will damage their credit for many years.

Not paying the mortgage is an option, if they really can't afford it, but they won't be able to stay in the home or save money. In a short sale, they may be able to get out from under this burden, but the amount of debt forgiven may be taxable. Forebearance will only dely the total amount due and reduce the principal portion to be refinanced (which would probably be at a high rate anyway). Finding an apartment to live in would be my advice if the rent is significantly less than their mortgage, taxes, and maintenance, downsize their lifestyle and possessions, and go ahead and foreclose. It will take some time, but credit can be repaired and they may one day be able to afford another house.

If it is an FHA mortgage, they could do a streamline refinance which doesn't need an appraisal. The only requirement is that they have been current for at least 12 months on payments and their new payment is less than their old one.

Mark
I'm curious as to why you say that they can't refinance just to save money? I could be wrong but was of the understanding banks don't really care why? If their credit is good, steady income or assests and they aren't upside down on the mortgage, they'll find a bank. It's up to them to see if the numbers work for them.
If they are going to live there several years after refinancing they should do it.

@Billy says ... "and they aren't upside down on the mortgage"

The questioner says .... "Right now we are upside down in our mortgage so to sell is not an option:

Any questions?

8.62 is a horrendous interest rate. In order for the questioner to have ended up with that rate only 3 years ago they must have had pretty bad credit.

Given that and the upside down it seems pretty hard to re-fi. However if there is any program they can use that would allow one they should definitely do it.

Given the current market and their upside down nature, I wouldn't worry about selling anytime soon. Any steps to get that rate down should be taken now but only on a fixed basis. No variable products should be considered or they could end up worse off in the end.

What lender in his right mind would want to take on someone else's debt of $104,000 when the equity protecting the lender is far less than $104,000? Look at it from the lender's point of view and you would have to be crazy to give them a new loan at a lower rate.

It is by no means a given that home prices will recover in a short time so the best thing to do is to walk away from it and start renting. This is the sad story of Buying High and Selling Low and it happens all the time in the stockmarket but has now happened to millions of homeowners and owners of commercial real estate. We are at the beginning of a long drawn out jobless recovery, coincidentally I watched a video this morning from an investment company, it was called, "The Mother of All Jobless Recoveries".

Here's an extract:
The U-6 jobless rate takes into account discouraged job seekers who have given up looking for work and those forced to work part-time due to the recession. This measure has risen to a new all-time high of 17.5% ... surpassing the previous record set during the devastating double-dip recession in the early 1980s! By this measure, nearly 16 MILLION Americans are now out of a job ... or one out of every six workers is displaced.4

In fact, if this U-6 measure went back that far, it would almost certainly be at the highest level since the Great Depression.

Apex
That sentence seems to have overlooked by a number of posters. Good of you to point that out. So what do you think about the refinancing qx. BTW your comment re college and is it worth it made me smile. It's there in the archives.

Apex
Sorry
I type too slowly.

>Is it wise for me to try to refinance at a lower >interest rate in order to lower my monthly >payment or should I just stay put and ride out >the storm?

If you are going to be there at least few years definitely. A 8.62% rate is a very high compared to today's rates.

You don't have to stay the entire 30 years to make it worthwhile. If you reduce your rate 3% you are going to save ~$3000/year. In two years you should have your closing costs covered.

>Right now we are upside down in our mortgage so >to sell is not an option.

That is a problem- banks are very wary of refinancing when you have negative equity, since if you default they are going to lose big time.

It is worth trying, you might talk with your current mortgage holder. They may be more willing to consider a refinance as they already have the risk of your current loan. If there is any chance you will walk away from the house it is really in their best interest to refinance it instead.

If you are not currently paying Private Mortgage Insurance (PMI), you will have to pay it on the new loan. I would guess it would be in the range of $50-$100/month, but you should be able to get a firm figure.

If Freddie or Fannie owns your loan (they own mine and I ddint know that before) you might be eligible under the new programs. Credit score doesnt matter much for those programs either unless its below some low cutoff they have. Your bank can tell you if you're eligible, its worth talking to them at least. For mthere if you are eligible its a simple comparison figure out how long it would be before the money you save by refinancing is more than the closing costs. I agree 8 is bad you should at least try for something better,

How times change!
Does anyone remember the exorbitant interest rates during Jimmy Carter's presidency?
I was half way through my career in engineering at the time but I was involved with a company that made 2nd. Trust Deeds. It was very lucrative for lenders, we wouldn't touch a 2nd. loan unless we had 30% loan value to equity value since our loan was subordinate to the 1st. Trust Deed. It was common to provide 2nd. loans at interest rates between 16% and 18% with stiff prepayment penalties and late fees.
I always inspected the property thoroughly before entering into a loan. It didn't matter whether the borrower's credit was good or bad, it was all about the amount of equity in the property. I only had one loan where the property went into foreclosure and in this case it was a 1st. Trust Deed so we were first in line to become the new owners of a beautiful property owned by a custom builder that ran into trouble.
Unfortunately for us he owed a lot of money to the IRS and they have the right to jump in ahead of everyone else so the IRS ended up owning the property and not us.

Eventually interest rates went down substantially and the stockmarket became a much better investment than trust deeds so I gave up being a lender.

At 8.62%, you should absolutely refinance if at all possible. Market rates today are in the 5% range. Over 350 basis points is huge. This will save you hundreds of dollars per month. Only downside is there is some closing cost and you will start over on a new 30-year amortization schedule, meaning you extended your loan by three years, but if you pay a little extra principal each month (i.e. just keep paying what you have been paying each month for a while), you will make that up pretty quickly.

And as others have pointed out, if it's an FHA loan, you can do a streamlined refi which requires no appraisal, as long as you have been current on your payments for 12 months.

Unless they do a short sale, they will not be able to sell this property for a least a couple years, depending on how far underwater they are on the mortgage. You cannot depend upon appreciation for the next several years. In that case, they are stuck in this home anyway, and they should most definitely refinance if at all possible.

104k at 8.62% means you're paying $808/mo for the loan (about $1000 in principle and $9000 in interest per year)

Refinancing to 5% would cost you about $3500, but would save you $250/mo (14 month to recoup).

If you kept paying the same you are now, but on the lower rate loan, you could be done with your loan in about 15.5 years. Which brings up a good point...why not just turn your current loan into a 15-year loan, you can get even lower rates too!

15-year loans are at about 4.65% right now. If you refinanced your home into a 15-year at this rate you would only pay $805/mo ($3 less per month than you're paying now), and pay everything off 12 years earlier.

If you can get somebody to loan you the money, then you should DEFINITELY refinance ASAP.

Check to see if your loan is owned by Freddie or Fannie (see the comment about "Making Home Affordable Plan"). If so, you can refi up to 125% of the current appraised value at much lower rates. If you are not paying PMI now, you will not pay PMI on the refi. You cannot do a cash out or roll in a second or do a loan consolidation under this program.

We have a similar situation- same loan amount, value has dropped almost 50% for this neighborhood in 2 years, and a higher than average rate (7.5%). Unfortunately ours is a rental property, so we can't refi right now and it be beneficial.

@Old Limey: "Does anyone remember the exorbitant interest rates during Jimmy Carter's presidency?"

I do. I was in college at the time, and my parents hadn't saved any money yet as we only came to the US from the USSR in 1978. With exactly $128 per person... What I do remember is getting 13% on my very first CD in 1983. Wish I had more money then; also wish I locked it for a longer period. But I was young and stupid and thought "what if I'd need the money". No internet then and no financial advice, though my mother told me I should've gotten a longer term CD. Not that it would've mattered as the amount was small, but still, this was risk free return - anybody who had money to get some 10 year CD or government bonds then didn't need the market.

As to mortgage rates, at one point they were in low 20%. At the same time people who had bought their houses in early 70s and locked some 9% or so were feeling lucky, as they could get far better rates on their savings. I heard at one point government bonds were paying 18%. One guy was explaining to us in 1979, how his mortgage rate of 9% was good for him but not for the bank...

In terms of the poster - we don't really know if they can or can't refinance: yes, they are upside down, but they may have cash to cover the difference. The post doesn't say how much cash they have. But I'd second what posters above said: if they can refinance and plan to stay there for enough time to break even, they should.

"Right now we are upside down in our mortgage so to sell is not an option."

And this logic is why so many people are horrible at managing their own investments. Selling is always an option. Walking away is always an option. Cutting your losses when they are small is better than inuring a major loss later on.

okay folks I am the reader asking the question here and thanks so much for all the great advice. I really do appreciate the comments. Just about everyone was in agreement that if I find someone that will do it, go for it and the general consensus is that it will cost me about 35oo dollars in closing costs. My only question left is should i finance the closing costs into the loan or take from my emergency fund to pay this 3500 dollars?

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