Deciding When to Refinance Your Mortgage

by Ben in Santa Barbara, by Paul in Marion Center, by Larry in Killeen

Deciding when it's a smart time to refinance your mortgage: After receiving an unsolicited refinance offer, Ben asks if he should refinance his underwater home. I'm puzzled by Paul's question about refinancing into a 15 year fixed rate mortgage. But maybe I'm missing a piece to the puzzle. What do you think about Paul's question? Larry doesn't know if refinancing his rental property makes sense or if he should seriously consider foreclosure.


Q 1: Should I refinance my underwater home?

By Ben in Santa Barbara, California

Hi Kate, Love your blog. Keep up the good work!

We bought a home for $625,000 in December 2006. Took out a 500k ARM (10yr interest-only) at 6.375% and a $125k 2nd mortgage (30yr fixed) at 8.1% with Citimortgage.

Our home is currently worth about 500k. Obviously no one will refinance us since we're underwater, not backed by Fannie or Freddie, and never missed a payment.

However, Citimortgage just sent me an unsolicited refinance offer for the 1st at 5.25% (30yr fixed).

I don't know whether to take it because:
  1. We'd be likely ineligible for future HARP schemes.

  2. Our arm adjusts to LIBOR plus 2.25%. So IF the LIBOR rates stay the same as today, we'd be running 3% when adjustment occurs.

  3. Why should I help Citimortgage get a potentially toxic ARM off their books when they have refused any refi help in the past?
On the other hand, keeping our payment fixed for 30 years seems like a good idea. In your opinion, which option would be best? Thanks, Ben

***zz-portrait-left.shtml*** Ask Kate answers: Should I refinance my underwater home?

Hi Ben,

I'm normally leery of unsolicited offers to refinance because the majority are advertisements cloaked in non-qualifying offers, just to make the lenders' phones ring. But that's not to say they never pan out!

However do keep this in mind if you are asked for non-refundable deposits or upfront deposits to be credited at closing. (Scroll down to the comment section for Forrest's question regarding paying for upfront rate locks.)

But to get back to your questions, here's my take.

1. As HARP guidelines stand today, only one HARP refinance per property is allowed. Could this change with HARP 3? It's anyone's guess since the program is only a proposal today.

2. True the LIBOR is low today but mortgage rates can surprise us! All we're guaranteed is that they'll go up, down, or stay the same. Beyond that, it's guess work, like trying to determine future HARP 3 guidelines.

So do this. Take a look at your finances. If your rate increased to the annual maximum, would you be able to afford the monthly payment? This is one way to decide whether or not you should refinance into a fixed rate.

3. I wouldn't base my refinance choice on denying Citimortgage, as much as it might feel good. Make the decision that would be best for you and if they benefit too, well, so be it!

There's no way I can tell you the very best option because only you know the nitty-gritty details of your finances. But hopefully this will give you some food for thought.

Best wishes in your decision making,


Q 2: Should I refinance to a 15 year fixed rate mortgage?

By Paul D in Marion Center, Pennsylvania

Kate, if I refinance my current 4.5% mortgage to a 3.1% on a 15 year term, add about $70 a month extra to the payment (which will still be a little less than current payment), I can pay the new loan off in the same time as my current loan.

Is it worth paying the new closing fees and interest?

***zz-portrait-left.shtml*** Ask Kate answers: Should I refinance to a 15 year fixed rate mortgage?

Hi Paul,

Um! I'm confused. Let me tell you how I understand the offer you've received. You would spend a few months of your life refinancing, only to save a couple of bucks a month and pay off your mortgage in no less time than is currently remaining on your existing term.

Is that right? Please come back to comment if I don't get it!

Maybe there's a benefit but I'm not seeing it! I'll be the first to admit that refinancing isn't a ton of fun. So if there isn't a major benefit... Well, you get my drift.

Best wishes for paying off your mortgage,


Q 2: Refinancing my rental property vs foreclosure

By Larry W in Killeen, Texas

Hi Kate, I have a rental property that has 2 mortgages from different lending institutions. The property is in Washington state and has been rented to great tenants for about 3 years.

I am upside down approximately $85,000. In addition, I must pay about $400 per month to cover the mortgage shortfall that rent doesn't cover. My income is such that I need every tax write-off possible.

My questions are these. Can this property be refinanced into one loan? Does it make sense to keep it as an investment? Or should I let it go into foreclosure? I am retired and live in another state. Thanks in advance for your help.

***zz-portrait-left.shtml*** Ask Kate answers: Refinancing my rental property vs foreclosure

Hi Larry,

This is a hard one. A knee jerk reaction to save a house is built into my lending-DNA. For years, I counseled my mortgage borrowers how to avoid foreclosure at all cost. And many thanked me.

That advice is encapsulated in my Foreclosure Avoidance series, some of the first pages I wrote for my website, never dreaming where the US financial and real estate markets were truly headed.

But I digress. Here's what I'd do. I would lay out my budget to see if the rental expense not covered by the mortgage is offset by the tax benefits.

Then I would look at my refinancing options. You can use HARP to refinance a rental. But it costs more. Read this letter about HARP 2 closing costs from a real estate investor who says he's trying to get his leg out of the bear trap.

You should also know that the HARP program which accommodates little-to-none and negative equity does not allow 2nd mortgages to be paid off in the refinance.

So that leaves the HAMP program which modifies existing mortgages on owner-occupied homes and rental properties. You can read about this at HAMP Mortgage Modification and Alternatives.

If your loan servicers do not participate in the HAMP program, ask them about an in-house modification plan.

But if the last resort to be able to keep your head above water is foreclosure, then it just is. Know this. You are not alone. But first, check out the Making Home Affordable Foreclosure options (HAFA) and call your loan servicer for more details.

Best wishes for getting YOUR leg out of the bear trap,



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