Since my last post on refinancing, I have visited a great deal of posts and articles on the web and have learned that we have something is common:
• Many of us have the same problem with trying to get a refinance.
That problem is:
1) We are underwater (our house is worth less than what we still owe). In mortgage terms, our loan-to-value (LTV) ratio is above 100%.
2) We faithfully make our payments on time
3) We have no other home equity or liens against our property
4) We have private mortgage insurance (PMI)
Number 4 is the real kicker. In most instances, this is where all the government help you see advertised all over hits a brick wall.
Technically speaking, if you are underwater, you can apply for the HARP (Home Affordable Refinance Program). This exert comes straight from their website FAQ’s:
16. Will I need mortgage insurance? If your existing loan has private mortgage insurance, you will need the same amount of insurance coverage for a refinance under HARP. If your existing loan does not have private mortgage insurance, it will not be required as part of a refinance under HARP.
So there you have it. You should be able to refinance the loan even if you have PMI. Unfortunately, this doesn’t paint the whole picture. As I searched around various message boards and blogs, I found that the problem is this:
• It is unlikely that a PMI company will approve a loan where the LTV ratio is above 100%
Click here to read a few examples of frustrated comments. As you can tell, this is a real problem for a lot of people. Throughout the past decade, it was very commonplace to buy a house with less than 20% down; fully accepting that PMI would just be tacked onto your payments. Now, unfortunately, PMI could potentially be holding you back from thousands of dollars in lost savings from taking advantage of the historically low interest rates.
Also since my last post, there has been more good news. Last month, the President announced that the 125% LTV ceiling on HARP loans would be removed. This can also be found on the HARP website FAQ:
10. There is no longer a maximum LTV limit for borrower eligibility. If the borrower refinances under HARP and their new loan has a fixed rate mortgage, there is no maximum LTV. If the borrower refinances under HARP and their new loan is an adjustable rate mortgage, their LTV may not be over 105%.
So although this new policy significantly helps you if your mortgage is underwater, it does not change the attitude of the PMI companies towards your situation, meaning you will still not likely get approved for the refinance.
Given this new information, my options on the table are as follows:
1) Go ahead with a loan modification application and see if my house appraises for less than 100% LTV. If it does, then I should have no problem getting approved for a refinance. I will either knock a few years off my loan (resulting in less overall interest) or have a lower monthly payment. All of my costs for the appraisal and closing would be absorbed into the new loan, so I would not pay anything out of pocket. Basically, from all angles, I win!
2) Strategically wait to do anything until I am closer to getting my income tax refund (around February). That way if I go ahead with a loan application and my house appraises for more than 100% LTV, I could still use the appraisal a few weeks later (I believe they are good for 120 days). With the tax refund, I could pay down some of the house principal trying to bring down the LTV to a place where I would get approved. The $400 I spent on the home appraisal would not be a lost cause then.
3) Go ahead with a loan application and see what happens. If my house appraises for WAY more than 100% LTV, more so than I could fix by throwing my income tax refund at it, then forget it. $400 on a home appraisal lost.
4) Don’t do anything and continue to keep making the same house payment. At least in this situation, I don’t risk the $400 to see how much my house is actually worth.
And the Winner Is …
At this time, I’m going to go with:
• Option 2
After doing all the math for my post on comparing investing and paying off your house, I can’t ignore the fact that a refinance would significantly save me money over the long haul. After all, I still have 23 years left in my mortgage! Plus, I doubt interest rates will change much in the next 3 months anyways. So I feel there is little to be risked at this point.
When something new develops, I’ll follow-up again with a new post.
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