I was recently asked by a question about refinancing by a client that I consider rather business savvy. "Why would someone want to refinance a house that is underwater (financially)??
Lets paint the scenario that many people are in:
1) They owe significantly more on their house than current market value: that is, they are "underwater".
2) They like their house and neighborhood, and believe that it is their responsibility to pay the debts they incurred, so they would like to stay, and not just walk away. They also have worked hard to get and improve their good credit scores.
3) They would like to refinance to get a lower interest rate , but nobody wants to loan them that much on a new loan. (Obama's current loan mod plan allows for a refinance on Fannie Mae and Freddie Mac loans- but only up to 105% of market value. NOT helpful if you are 110-120% in debt!)
4) They may have a diminished income because of the economic downturn, and meeting their high mortgage payment is getting increasingly difficult....OR they may be proactive in making sure that they are in the best possible position so that they DON'T miss any payments!
5) They are really feeling trapped-- and angry when they read about the big bonuses that some big banks and business CEOs are still receiving! ANd so AM I!!
So what to do?
There has been Congressional conversation about a new extension to the Home--- plan that would allow refinances up to 125% Loan-to-value. That would certainly be helpful to many more persons than the current plan. A 1%-2% drop in annual interest rate can save $100's of dollars per month on larger home loan. $200,000 at 6-1/2% on a 30 year loan is $1264/month. 5% rate yields less than $1075. That is almost $200/ month savings on a moderate sized home in many markets.
Multiply that by 2 (for a $400,000 mortgage) or more for homes in more expensive areas and you can see why the ability to refinance can be a great help. Perhaps the larger factor is that, with the lower payment, I can stay in my home and continue to pay my bills, (continue)being a productive member of my community, and not disrupting my family's life.
My hat is off to-(and I am looking to help anyway that I can) any homeowners who are still living by the principles that standing up to responsibilities that they took on is only their just and right response. If the market was still growing, we would all want to take the profit that accrues, do we not? That is the risk of business and purchasing over renting.
Do homeowners need to make some adjustments? To be sure, we do!! But help for the homeowner that really helps the homeowner would be a welcome change to big business and big government!
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