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Dec 13 2010 12:00AM

Question


I bought a $300,000 house a few years ago with five percent down, and a 30-year 5.25 percent mortgage. Now the house is worth an estimated $230,000. It doesn’t seem possible to refinance because I am “under water” and I don’t want to walk away if it will ruin my excellent credit. What can I do to improve my situation?

Answer


Assuming that you have a steady job and the monthly mortgage is not a burden for you, FPA member Reed C. Fraasa, CFP®, RLP®, president of Highland Financial Advisors suggested that you might consider the following:

“First, you have a mortgage at historically low rates,” he said. “Don’t beat yourself up over what you have now relative to the grossly low rates available now. Even those are not all that much lower than what you have. To refinance now at the lower 30-year rates will only save you between $90 and $130 a month, depending on your rate. With the cost to refinance, it would still take about two years to recover your costs.”

The second things to consider is this: “If you are happy in your current home, why be concerned about the current value,” Fraasa said. “A home is a use asset. We expect it to appreciate over time, but meanwhile we utilize the asset. The house will recover in time and you will perhaps move on to something else. You may even have to realize a loss on the property in a few years if you need to move, but the value has not come back yet. “

And, the last item of note is this: “If you have the means to pay your mortgage, there is no government program available to help in your situation,” he said.

Another financial planner, FPA member Scott Noyes, CFA, CFP®, president of Noyes Capital Management, LLC, agreed with Fraasa that your current mortgage rate is low and that there’s little that can be done except wait. “Some bank programs may refinance you as your loan to value level is around 125 percent assuming all of your other credit parameters are first class,” he said. “However, loans on under water properties typically have a higher rate than benchmark and closing costs are one to two percent. Your current rate of 5.25 percent is not that bad. I suggest you live with the mortgage you have and save the refinance costs. In a couple of years, your home price will be up again."

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