Q: Our home is under underwater. We have a first mortgage with a big box lender for about $450,000 at a fixed rate of 6.5 percent and a second with a different big box lender for $100,000 at a variable interest that is now at 4.5 percent.
Homes in our neighborhood are currently listing at $425,000 to $580,000 and we have some foreclosures in the neighborhood. We purchased our home in January 2006 for $615,000. Our credit scores are between 700 and 750 and we have annual income of about $250,000. We’d like to refinance into a fifteen year mortgage if rates are good. What do you think?
A: I think it’s a great idea for you to try to refinance both of your mortgages and get a fifteen year mortgage at today’s rates that are close to 3.5 percent. But you’ll have to overcome certain problems if you want to get it done.
You have about $550,000 in mortgages on your property and you indicated that your home is underwater. That means that you owe more to your lenders than what your home is worth. Unfortunately, your home value, and not your income or your credit scores will cause you the most problem in refinancing your home.
If you thought that you might be able to refinance only your first mortgage and keep the second, think again. You will need your second lender’s consent to refinance your $450,000 mortgage if you plan on keeping the second. With home values where they are, you are unlikely to get the second lender to consent to your refinancing the first loan. More likely, they will ask you to pay off your second loan.
If you have saved cash over the past years, you might be able to pay off the second lender in total and pay down the first loan to a loan balance of $417,000. If you do that, you shouldn’t have too much trouble refinancing your home.
I wish you had better credit scores. I’d like to see your credit scores in the range of 750 to 800. You might want to obtain a copy of your credit report from AnnualCreditReport.com and pay under $10 for your credit score to see where you might improve your finances and bump up your credit scores, particularly if you don’t refinance now but can a couple of months from now.
If you don’t have the cash saved up to pay down your loans, you will have to find out what your home’s value is and work backwards. If your home is only now worth $525,000 and you can only get financing for up to 80 percent of that amount, you’ll be in trouble.
I would suggest you sit down with a good mortgage lender or mortgage broker and see if they have any lenders in your area that are willing to take a risk on you. You might be able to get a loan for $417,000 and obtain a second loan for maybe $50,000 more. But this scenario will still require you to come up with cash to pay down your mortgage debts.
If you don’t have any money to pay down your debts, you can contact your current big box lender and see if they have any programs which you might qualify for. Beware, however, that they don’t try to put you into a trial loan modification. If they do, they will probably harm your credit history and score and you’ll have a terrible time down the road if they later reject you from a permanent loan modification to then try to get any other loan.
We’ve received hundreds of letters from borrowers that have tried to work with their lenders to obtain loan modifications only to be told they qualify for a trial modification. They go into a lengthy trial modification, while their credit is damaged extensively and then they are ultimately rejected from the program and cannot get a permanent loan modification.
You only want to proceed if the lender has a permanent loan for you today. That means you go straight into a permanent modification. I have not heard of too many homeowners that have been successful at getting this done, but you could get lucky. Tell us what happens.