Since my last post on refinancing, I’ve read a lot of articles and posts online and noticed that many of us share common issues with refinancing. Here are the main problems:
1. We owe more on our homes than they are currently worth (our loan-to-value or LTV ratio is above 100%).
2. We make our payments on time.
3. We have no other liens or home equity loans.
4. We have private mortgage insurance (PMI).
Number 4 is the tricky one. This is often where government help falls short. If you’re underwater, you can technically apply for the Home Affordable Refinance Program (HARP). According to their FAQ, if your existing loan has PMI, you’ll need the same amount of insurance for a HARP refinance. If your current loan doesn’t have PMI, it won’t be required for a HARP refinance.
So theoretically, you can refinance even if you have PMI. But there’s more to the story. After digging through various message boards and blogs, I found that it’s unlikely a PMI company will approve a loan where the LTV ratio is above 100%.
In the past, buying a house with less than 20% down and accepting PMI as part of the deal was common. However, PMI might now be preventing you from saving thousands due to the low-interest rates we have today.
More Changes:
There have been some positive changes since my last post. Recently, the President announced that the 125% LTV ceiling on HARP loans would be removed. This means there’s no longer a maximum LTV limit for fixed-rate mortgages under HARP. For adjustable-rate mortgages, the LTV limit is 105%.
While this change is beneficial for underwater mortgages, it doesn’t alter PMI companies’ stance, so getting approved for a refinance remains unlikely.
My Options:
Given this new information, I have these options:
1. Apply for a loan modification and see if my home appraises for less than a 100% LTV. If it does, refinancing shouldn’t be a problem, and I could either shorten my loan term or lower my monthly payments. All costs for appraisal and closing would be rolled into the new loan, so no out-of-pocket expenses. Essentially, it’s a win-win.
2. Wait until around February when I get my income tax refund. Then, if my home appraises for more than 100% LTV but is still relatively close, I could use my tax refund to pay down the principal enough to lower the LTV to an acceptable level. This way, the $400 appraisal fee wouldn’t be wasted.
3. Apply now and see what happens. If the appraisal shows a significantly higher LTV than I can remedy with my tax refund, I’ll abandon the plan, losing only the $400 appraisal fee.
4. Do nothing and continue making my current house payments. This option carries no risk of losing $400 for the appraisal.
And the Winner Is …
I’ve decided to go with Option 2. After running the numbers in my previous post comparing investing and paying off your house, it’s clear that refinancing will save me a lot of money in the long run. Plus, I still have 23 years left on my mortgage, and interest rates are unlikely to change much in the next three months. So, I don’t see much risk with this choice.
I’ll provide an update in a future post when there’s new information.
Table of Contents:
Chapter 1, Chapter 2, Chapter 3, Chapter 4, Chapter 5
