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Upside Down Mortgage Refinance

Upside Down Mortgage Refinance
Mark Cappel
UpdatedApr 16, 2012

What Are My Refinance Options With A 105% LTV?

I am in a pickle and need advice. My debts are weighing me down, and need to find a way, if possible to cut my home loan expense. The market value of my Vermont home is about $260,000 today. Two home loans: First is $206,000, the current rate is 3.125%, and is a 7/1 ARM that kicked in last fall and will adjust this coming August. Paying interest only on the first. Everything adjusts in 2 years and we will need to start paying the principal. Second is $59,000, a home equity line at a low rate. Therefore, the total borrowed amount is $265,000. My monthly payment on the first is $960. I think I would need to pay down the line of credit to 80% or 90% to refinance, but for me to accomplish that I would need to consolidate my credit card debts. This would change my credit score and probably prevent a refinance. Am I missing an option here?

You mentioned you want to reduce your monthly payments for your $206,000 senior and $59,000 junior home loans. Alas, I cannot see any positive solutions to improve your present situation. Let us look at your issues.

Refinance Rates Today

The first issue is you pay 3.12% on the senior, and I will guess about 5% on the junior. Both are good rates as of April 2012. I will guess a $349 monthly payment on the junior, for a total housing payment of about $1,300 (not including property taxes and fire insurance). Let us say for the sake of argument you could refinance both loans at zero cost and there was no issue with equity. You mentioned Vermont. Here are the Vermont-area rates for new loans in the $260,000 range:

  • 3/1 ARM = 2.5%
  • 5/1 Interest only ARM = 3%
  • 7/1 ARM = 2.9-3.4%
  • 30-year fixed = 3.75-4.25%

Rates for refinances are slightly higher. Best-case scenario, let us say you refinanced both to a 3% interest-only ARM. The payment would be $662. Refinancing both to a 2.5% amortizing ARM would result in a $1,047 payment. Refinancing both to a 30-year fixed at 3.8% would result in a $1,235 monthly payment.

However, you have another big problem: The property is underwater at a 102% LTV. No conventional lender will touch an LTV that high. As attractive as that potential $662 monthly payment may be, it is simply out of reach because of the LTV issue.

Buying down to get to an 80% or 90% LTV is an option to qualify for conventional refinancing. However, you mentioned other debt issues, so it appears you may not have the $26,000 to $50,000 to knock your LTV down to 80%

Is HARP In Play?

Then there is HARP, which is designed for underwater homes. Let us assume the first is owned by Fannie Mae or Freddie Mac, and the loan and homeowner otherwise qualify for HARP. The HARP refinances readers are reporting are at minimum 3.8%, and most are higher. A HARP loan would help by putting you into a stable, fixed-rate loan. But the monthly payment would be higher because HARP does not allow junior loans to be refinanced with the HARP loan. A HARP refinance would move you backwards in terms of monthly payments, assuming you qualify.

What About 40-Year Loans?

In theory, there are 40- and 50-year fixed-rate loans. These would, if available, push the monthly payments lower than a comparable 30-year fixed. However, these are unconventional loans and I cannot find a lender willing to quote an interest rate for a 40-year or 50-year loan online. When I run an amortization schedule on a $265,000 40-year loan using today's 30-year fixed rates, the difference is about $100 per month in comparison to a 30-year term. Going to a 40-year term on a $265,000 loan would not result in a meaningful monthly savings.

Aggressive Strategy

Some underwater homeowners will follow an aggressive strategy for resolving junior mortgages — defaulting on the junior. The idea is juniors will not foreclose on underwater properties because when they do so, the senior will also foreclose to preserve its interest. If the house is deep underwater and the balance of the senior exceeds the market value of the property, the junior would be foolish to foreclose. It would get nothing because the senior has the right to be repaid first. However, here, if the house sold for at or near the market value in a foreclosure sale, then the junior would see almost the entire balance of its loan returned. Therefore, defaulting on the junior to strong-arm it into a lump-sum settlement would be a highly risky strategy in this situation.


I wish I had a creative, helpful solution. The nationwide decrease in home values places many people in a bind. You would have some options if your LTV was lower. Conversely, if your property was more underwater (a higher LTV) you could gamble and default on the second in hopes of negotiating a settlement later.

I hope this information helps you Find. Learn & Save.