Home Affordable Refinance: bad idea?

[CrazyP]

Hi everyone,

I'm a new member and this is my first post. I'm glad that I found these forums as they are exactly what we need to help achieve my wife's and my New Year's Resolution to get our personal finance under control.

I feel like we have been following a good savings plan for the past couple of years: We put about 20% of our income into a 401k and Roth IRA, and we put about $500/mo. into a 529 for my two-year's old's college fund. However, we were incredibly stupid when we bought our house and we're trying to decide the best plan for our mortgage and overall debt servicing.

We bought our house--a fixer upper--in 2006 near the peak of the market for $340K and even at that time I don't think it was worth that much (long story). Now Freddie Mac estimates that it is worth $286K but in reality I think we could only get $225 for it given the amount of work that still needs to be done. The house feels like a money pit and it's never going to be a dream home no matter how much we sink into it. We bought the house with with 0% down using a combination 80/20 mortgage... $272K for the first mortgage at 6.375% and $68K for the second mortgage at 8.45%. The 2nd mortgage has a 15-year balloon option but we've been making extra payments towards the principle to make sure it is paid off in 15 years.

Because we are heavily underwater, I called GMAC, our mortgage provider, last December about the possibility of doing a refinance through the Home Affordable Refinance Program (HARP) and we amazingly met the 125% LTV requirement. We locked in a rate for a 15-year refi at 5% or a 30-year refi at 5.375% (this is on the first mortgage only). But I later found out upon reading the Good Faith Estimate that the closing costs are about $7300, $5000 of which are to be financed. Unbelievably, they are asking us to pay $3600 for 1.375 points and adding that cost to the mortgage. Without paying for points, the interest rate rate reduction isn't all that compelling. (5.675% for a 30-year, 5.375% for 15-year). No I'm not sure if I want to go through with the refinance.

What is our best option here, given the uncertainty in the market and our desire to get out of this house in a reasonable time frame? The 15-year sounds somewhat attractive, but I worry that we might be throwing away good money into a house that might never be worth what we paid for it, and the increased monthly payment might cause us to have to reduce our savings. To me, having money in the bank seems safer than having it locked up in negative equity, even if it means that we'll potentially come out with less in the end.

We've been going around in circles for a couple of months and would appreciate any advice. Thanks!

[jIM_Ohio]

I can write much of that same situation.

We bought in Dec of 2005 (at the peak), paid $350+. We did put something down, but it was about 7%. Where it differs is that we cannot refinance (we do have 2 fixed rate mortgages though). We also have 22 month old twins, so it appears as though are kids are the same year in school.

In your situation, I would run some numbers.

First, paying points is how the mortgage companies can handle the 125% LTV- the fees up front help that process out. Here is what I would do (and am doing myself):

1) Free up cash flow to pay down the mortgages and/or pay the fees to refinance. It might make sense (for example) to not contribute to the 529 plan short term.

My logic to this is if you can pay off both mortgages before kids start college, you have $2000+/month you can contribute towards college savings. In my mind $2000+ per month for 2-3 years is better than $500/month for 16 years. Run those numbers and decide if that makes sense to you.

2) If paying points is not your cup of tea, focus on paying down the mortgages. Do you have a timeline on when your extra payments will pay off second?

Based on your numbers (very similar to mine) I am guessing you pay about $400/mo to second (before paying extra) and $1500/mo P&I on first.

If you are paying $X more to second, will it be paid off in 15 years before balloon?
If you are paying $500+X more to second, how much sooner is the 2nd paid off?

If that second mortgage does not exist, your refinance terms will improve (because you will not be limited to using GMAC or similar HARP based lenders).

3) Keep a mid and long term focus on your money. Short term your net worth is taking a hit. Selling is surely a lose-lose situation (lose all money you have put into the house, might be tough getting another house with nothing down).

Mid and long term means do not stop retirement contributions because of a bad decision on the house. Do not stop trying to pay off the debts either- the paid off debts improve your financial balance sheet for household. Most importantly, have patience.

4) Have you done "comps" for your neighborhood? I have talked to banks about refinancing every 6 months or so. Because our neighborhood was not "selling" many houses (any) which are anywhere near the size of ours, getting a comp for the refinance was a stumbling block. The house across the street now has a sale pending sign out front, so once it closes, you will be sure I will be looking to that house for a comp and possible refinance.

I was told by a real estate person if a comp for what I paid for my house occurs on my street, more than likely I could refi without needing a special 125% LTV or similar program.

[zetta]

Here's a good calculator concerning refinancing:
Loan Comparison - Refinancing

Other loan-related calculators:
Hugh's Mortgage and Financial Calculators

[zetta]

Based on the refinance calculator, it looks like your break-even point is about 36 months. Probably worth doing if you will stay in the house for several more years. Any chance of taking out more and paying off some of the 2nd mortgage?