If you want to refinance an underwater mortgage loan after the PMI is removed, look into a HARP 2.0 refinance, but there are fees and costs.
Q: My husband and I purchased your book “100 Questions Every First-Time Home Buyer Should Ask” ten years ago. We are happy to say we have never been late or missed a mortgage payment.
We want to thank you for writing such a great book. We were able to purchase our home and be at peace about all of our decisions because we had your book to guide us.
Here’s why we’re writing: We live in the Atlanta, Georgia area. The market here is terrible. Home values have dropped so much it should be illegal. The interest rate on our loan is 5.37 percent. We were recently notified by our lender that we had met our pay down requirement and that our private mortgage insurance (PMI) has been automatically terminated.
While we will have extra cash because we will no longer have to pay PMI, our house has fallen so much in value that we know we’re way underwater with our loan and we have no extra chunk of cash to put toward the equity. So even though the bank thinks we have paid down 20 or 22 percent on the mortgage, we know better.
But we would like to reduce the interest rate we’re paying. We have been advised we may qualify for the Home Affordable Refinance Program (HARP) but we are afraid to make any moves without some sound advice on whether this could hurt us in the long run.
Would you kindly respond and advise us on what you believe our next step should be? We have always been very careful before we made any big decisions, and now that we are looking to refinance we want to make sure we avoid any potholes or scams along the way. All we want are the tools to make an informed decision.
A: Thank you for your kind words about my book. I’m so glad you found it helpful.
It’s nice that PMI has been dropped from your monthly payment. But you’re living in a community that is among the hardest hit during the Great Recession, and as you have seen, home values have dropped more than 50 percent in some parts of the Greater Atlanta market.
It would be terrific if you could refinance your 5.37 percent mortgage to somewhere in the 4.5 percent range. This may be possible with a HARP 2.0 loan. You should talk to a local real estate agent about what prices homes are selling for in your neighborhood (including foreclosures) and try to get a ballpark range of what your home is worth. Then, subtract the amount of the mortgage you still owe.
If you have even a little bit of equity, you should be able to refinance. With HARP 2.0, you should be able to refinance even if you’re underwater if you have not missed a payment in the past 12 months (or ever, which is your situation).
Start with your own mortgage lender. Call and ask whether your loan qualifies for HARP and what are the steps you need to take to be evaluated for a HARP refinance. You should also call several other lenders to see what interest rate they would offer you for a HARP refinance.
By shopping around, you should be able to make the right move.
The key thing is to refinance the existing balance. We’re hopeful that because you have paid down a significant portion of your loan, if you refinance less at a lower interest rate, you would save on a monthly basis. If you can swing it, we’d love to see you refinance to a 15-year loan. That interest rate would be even lower, and you might wind up paying exactly what you had been paying all of these years. You would just pay down the loan balance a lot faster.
Just make sure you understand the fees and costs involved in the refinancing. Given the relatively low rate on your current loan, if the fees to refinance are high, you might be better off keeping your existing loan over paying the fees and getting a new one. Another thing to keep in mind is that even if your current lender may be willing to refinance your loan, you might want to shop around. We’ve heard from plenty of people that their existing lenders were the highest cost lenders to refinance.
Ask questions and compare fees, costs and amortization schedules. Good luck!
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