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July 29, 2010

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Refinancing to save 350 a month is a great idea, except that you are increasing your financial risk by putting 30k of your cash into something you may never see again. That is like buying a stock that you know will go down 99% tomorrow, but pay you a dividend of 3% for the next 30 years.

If you intend to stay in this house, use a bit 5k of your savings to make the much needed (need being the optimal word) in upgrades. Wait for the market to stabilize and then make a better decision as to the certainty of value of you home and then refinance at that time.

Consider the worse case in this event, you buy down the mortgage and refinance, you have no savings, manage to avoid the need for the emergency fund, and then the market continues to drop another 5-10%. When you hit a problem and can't pay the mortgage, if the bank forecloses, you at least will still have your savings account.

Additionally, saving the $350 and not touching means it will take around 7 years to recover 30k of the cash put up front.

Rates will stay low and only go up in small incremental jumps (50 basis points at a time) which means you could refinance into a mortgage easily in the 5% range in the future.

Look to see if the mortgage is held by FNMA or FHLMC. There are programs made for your circumstances. It allows a refinance of up to 125% of the appraised value for a rate and term refinance. This is for people with very good credit and reserves to get a lower rate even though they may be "under water" on their mortgage. The best place to start is on the the FHLMC anf FNMA websites. There is a place to put your address and name in and it will tell you which of the two might have your mortgage. If it sin't with either one, call the company you make your payments to and ask if they have a similar program.
No matter what don't be "sold" and take the time to read everything you sign, especially the good faith estimate and truth in lending disclosures. Get these documents from more than one lender. Compare them. If you are saving the equivelan of $350 per month...essentially income from a part time job, think of this process as a job. Not quick, certaintly not easy....but well worth it. Since you are underwater, consider a shorter terms such as 15 yr or 20 year mortgage. This will esentially get you out of negative equity quicker. Hope this helps.

You may be able to refinance via MakingHomeAffordable.gov if your current loan is backed by FannieMae or FreddieMac.

Based on what you're said here, I wouldn't refinance. Mainly because you're going to be wiping out your savings and emergency fund, with no plans to replace it. If it were just wiping out savings (and not the emergency fund too, I might consider it.) Lots of people lose their "stable jobs".

$350 divided by $30,000 = a 11% yearly return on your investment. Pay down your mortgage and refi, it's a NO BRAINER. Where else can you get a 11% yearly return guaranteed?

Sam
The Yakezie

You won't need anywhere near the amount up front to refinance to a 30-year mortgage, running at 4.5-4.75% if you shop around.

Jessica is correct. The MakingHomeAffordable program is designed for people just like you. You may not even need an appraisal, just doc fees and a few others. You do NOT have to have an FHA loan to qualify for an interest reduction purpose. The new loan will be FHA, and typically .25% higher than the best conforming rates.

I did just what you are trying to do with the same bank that held my previous 6% mortgage (BB&T) and it only cost me $550 up front on a $167,000 loan.

If their emergency fund is on the table to complete a refi to save $350/mo with which to make home improvements, is that really an emergency fund? For me, unless it was a matter of use the e-fund or lose the house (and then only if doing so would save it, not just delay a foreclosure) it wouldn't even cross my mind to drain my emergency fund. I never think of that as a liquid asset for planning purposes.

If their emergency fund is on the table to complete a refi to save $350/mo with which to make home improvements, is that really an emergency fund? For me, unless it was a matter of use the e-fund or lose the house (and then only if doing so would save it, not just delay a foreclosure) it wouldn't even cross my mind to drain my emergency fund. I never think of that as a liquid asset for planning purposes.

The interest reduction refi w/o appraisal is NOT part of the Making Homes Affordable program. My bad.

However, it IS part of a federal program since April 2009 to lower payments for people with conventional or FHA loans to an FHA loan, who are not at risk of foreclosure. I don't remember what the name of the program is. The bank that holds your current mortgage will probably be the best place to start. They are paid an amount to encourage banks to refinance credit-worthy mortgagees to lower their rates. Contact a BB&T loan officer and see if you get the same program I used, and if they refinance in your area.

Don't use up your emergency fund to refinance a conventional loan given the lengthy payback period. Your rate is high enough now, that the FHA loan would still offer huge savings.

The program I mentioned is called "FHA Refinance Loan" or "FHA Rate/Term Refinance". It allows conventional mortgages to be refinanced with an FHA loan, up to 97.75% of the home's value. Here's a link to one of the brokers.

http://www.fha-101.com/fha-refinance/fha-refinance.html

Since you are under-water with your home's LTV ratio, the only way to get an FHA Refinance Loan would be to get a subordinate Home Equity Loan or HELOC that would cover the $25-30,000 of negative equity, or up to 97.75% of your home's appraised value. Basically, it's an 80/20 or 90/10-type mortgage. HELOCs and Home Equity Loans are more expensive now, with fewer Prime+0 rates, adjustable rates, and high fixed rate options. They also have their own costs, but if you refinance with two separate banks using a mortgage broker like DNJ (Cary,NC), the closing costs and appraisal are grouped together.

If this helps to save you $100-350 a month it might be worth trying if the payback period is less than the time you expect to live there. Just be sure you either get a low fixed rate HELOC or equity loan subordinate, or if you can't, be prepared to pay the extra cash saved from your primary mortgage to paying it off! Rates will go up eventually.

I went to the MakingHomeAffordable.gov website. I didn't qualify for one of the programs, but I did qualify for refinancing without PMI since my home was worth $25k less than what I paid for it, but I still owe less than its appraisal. The worst that the reader can be told is, "No."

To the original poster. The Making Homes Affordable program is the real deal. Please do yourself a favor and call your current lendor and see what they can do.

I was in a very siimilar situation (mortgage higher than appraisal) and was able to refianance to a lower rate through the program. And here's the kicker. It only cost $2,400 to get my rate reduced by 3/4 percent. You also have to option of rolling the closing costs into the loan. Depending how much your rate would drop, you could potentially break even within a year in your case.

There are a couple catches (at least there were for me). 1) The only way to use the program is to stay with your current lender. i.e. My old mortgage was with chase, my refiance has to be with Chase. 2) You won't get a rate as low as the current rates. I could only get mine locked down to a 5.25, when rates were in the 4's.

I'd be happy to share more details if you want. Good luck!

When I run the numbers in Excel on a 232k mortgage and then on 200k (or 208k), I get monthly savings in the range of $450-$500 (perhaps the paydown of the mortgage was not factored in?). I would explore further (with the intent to go forward). Having the savings in place feels good, but locking in that low rate will be a long term win. With the $450-$500 additional coming in the door each month, the savings will build back fast. Emergency funds will rebuild quickly and then it is gravy after that.

i take it since you emphasized the stability of your jobs that you can almost guarantee you wont be fired or laid off. if that is the case, i say refinance. the lack of an emergency fund will not hurt you as long as you have your stable job. put off the upgrades once you refinance, put the extra 350 a month into savings for a year and then consider doing the upgrades that you need. thats what i would do!
Preferred Financial Services

This post could not be more timely! We are currently considering a refi as well. Our savings would be ~$1,000 per month (going from 6.375% to 4.875% on a 30-year fixed). We'd need to put in ~$70,000 to make it happen though. Doing it would bring down our cash levels to about 3 months of expenses. It's doable, since we'll be able to save faster, but it's scary not having the security blanket of cash on hand. Any advice?

Sinking more $ into a depreciating asset seems like reaching out to catch a falling knife, especially as you say that experts don't even think prices in your market are done falling yet. Sit tight.

The previous post has it right. Sit tight and hope for the best.

If you plan to stay in the home, then it makes a lot of sense to refinance into astonishingly low rates. When the economy begins to recover - which it will - rates will go up and you'll miss your chance to save.

As many people have already mentioned, calling your servicer is the best place to start. Servicers are currently incentivized under the Making Home Affordable plan to help people in your situation refinance to a lower rate, and some will even forgive part of the debt - while others will simply restructure your loan to a longer term. Be persistent and negotiate to your best advantage!

Also true that if your loan is Fannie Mae or Freddie Mac, you could qualify for a no-appraisal loan that would save you money without having to hand over your savings.

Whatever you decide, I would not recommend draining all your savings. I think it's very possible to refinance and take advantage of low rates without having to do that.

As an aside: Why not use some of your savings to do your needed home improvements? Independent of refinancing?

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