Completely aware that we're not all financial experts-a mortgage question, please

In My Humble Opinion
1

When I bought my house, the bank did the first mortgage, and a second, interest only mortgage, written that way, they said, to help me avoid the P.M.I. So I have had 2 payments a month, one to each loan, since then.

They said that at 10 yrs, I could roll them together.

Then the economy, and housing prices shit the bed.

So, I am coming up on the 10 year mark, when the principle on the interest only loan has to be starting to be payed off. I have not had the appraisal yet, but the bank is doubtful that the home’s value will equal the amount of both loans combined. They are urging me to HARP the first mortgage, freeing up funds to pay the second one down. 5.375 fixed 30 years.

So the second mortgage is currently at 4.24 variable, with 18 mos. left on the interest only period. The same bank, completely different loan dept. which is weird, is offering to convert that interest only variable to a 6.75 fixed today, citing the chances that the prime will go up in the next 18 mos.

I should mention that this house is not owner occupied.

Any ideas? This is a stellar performing loan IMHO, not one delinquency ever, even for a day. I am thinking I should start shopping for another company with this loan, but of course, I am leary, since there’s so much scam out there.

2

Damn straight you should shop around. Do these things:

Pay the $300 for an appraisal. NOT one recommended by any bank. See what that person says.

Go to a few large banks and ask what rates they’re charging and tell them your situation. Ask them if they want to bid on your refinance.

Make sure you hit at least one credit union and ask them the same thing.

Once you find out that you can get a better deal elsewhere, inform your current mortgage company and see if they’ll suddenly be more reasonable.

Don’t accept an interest only again. Last time I 80-15-5 (or whatever) both were standard loans with PITI being paid each month.

Good luck! Let me know what happens.

3

I don’t disagree with anything Jonathan says, but why would another bank bid to refinance an underwater second mortgage?

4

Sure, if you just want that info for your personal satisfaction. But no bank will accept such an appraisal as a factor in a loan offer; they will have to order it themselves, and the feds require them to use a random name from a pool of qualified appraisers.

Sucks, but that’s just the way it is.

Shopping around is always a good idea if you have good credit.

5

What do you have against HARP?

6

First, I think the bank’s advice is in general sound - refi the first to a lower interest rate, pay down the second without refinancing. I suspect it will be a long time before the interest rate on your variable 2nd exceeds 6.75% unless it hasn’t already adjusted at all. I doubt you can get any bank but the original to refinance your second mortgage as a second mortgage. You always have options in unsecured loans, such as personal loans or credit card balance transfers, etc, but those probably are too expensive vs what you have now. Your other options are probably strategic default, or stick with what you have, but refinancing the first is probably better than sticking.

7

Your variable rate is prime + 99bps? It seems unlikely that the prime rate will rise to 5.76 in the next 18 months.

8

I think it is possible that the fact that the house is not an owner occupied residence may make getting the very best rate on a residential refi a bit more difficult. Income properties are looked at bit differently than primary residences.

Other than satisfying your own curiosity re value I doubt getting an independent appraisal will give you any leverage or credibility with mortgage lenders as lenders (with good reason) will generally not give much credence to externally contracted appraisals. If you know a good residential agent giving them some decent restaurant gift cards for $ 100. or so for an informal conservative market analysis will probably accomplish the same thing re getting a handle on true market value (for yourself).

If you determine you are truly upside down re remaining loan amount vs existing equity I’m not clear on why lenders would be chasing you with their best rates to replace your entire loan regardless of your payment history. Get a handle on your value situation before you start pitting lenders against each other for your business or you may not get the results you want.

9

deltasigma, nothing against HARP, in fact surprised it applies.

I am not much underwater actually. I had a large down payment, and have been improving it steadily-2 new A/C- heat pumps, a new roof, a new bathroom. And as an investment property, it’s a bit of hot commodity, esp. as it’s now only a block from the new light rail. Investors are looking for these properties now here in Phoenix. And as I said, the loan has performed these days, with defaults and foreclosures overrunning the city, I stayed the course.

I just want to be sure I get the best deal possible. I know banks don’t want homes, they want cash.

ReticulatingSplines, sorry, I don’t understand what you said. The current variable is at 4.24, they’re offering to fix the rate, which would protect me against future rate increases.

10

If you are not in danger of default, I’d be surprised if they actually do anything, especially with it being a NOO property. Bank Logic - if you’re making your payments and are current, you don’t need help.

If the appraisal comes back less than the outstanding combined UPB, then you’re not going to be able to refinance, most likely.

Who is your bank?

11

Have you looked at places like bankrate monitor? I just checked Phoenix and made up some numbers. The lowest down payment I could use was 5% and I put in $300k. This was for residential but I’m seeing rates barely over 4%. They probably have a calculator for commercial property too if you want to poke around.

The St. Louis Fed site might be worth a look but they seem to crib Bankrate’s data.

The thing you need to watch out for though, and you probably know this, are the points and fees. If they’re humping a low rate then they’ll probably try to stick it to you on the origination fee and vice-versa. At least that’s how it used to work when I worked in that industry. I don’t imagine it’s changed much.

edit: by the way, I’d be very wary of any kind of a adjustable mortgage. You should assume that rates will go higher, possibly substantially and in the not too distant future. Maybe that will turn out to be wrong but personally I think it’s a little like betting the next cylinder in the Russian roulette revolver is empty.

12

FWIW - ARM loans are a dying breed since the crash, and 80/20 loans are basically non-existent.

13

Right, I mean are they deriving the 4.24% rate by taking the prime (3.25%) and adding .99% to it? That means for the 6.75% deal to save you money, the prime rate has to rise to 5.77% in the next 18 months, which is unlikely. I don’t see the upside for you. It’s like selling earthquake insurance to a Floridian.

Rule of thumb: When a bank says they want to “protect” you, they most certainly are looking to make more money off of you.

14

OK, now royally confused. deltasigma, you say be wary of adjustables, and I am, the 2nd is an adjustable, but apparently not a mortgage at all, but a line of credit. And ReticulatingSplines, in 18 mos. that 2nd, the adjustable, starts having to be paid off, not just the interest as I am paying now, but the principle, which will increase my monthly out go. And maintaining that building as a rental is costly!

So essentially, I am trying to prepare for the increase in monthly payments in 18 mos.-that’s where the HARP offer comes in. And why I wonder, since that 2nd is going to fix at some point, or perhaps remain adjustable, I shouldn’t just lock it in now?

I am sure I am making a muddle of this explanation.

15

The only thing I know about the HARP program - well, thought I knew,not so sure now - is that since it’s subsidized. Therefore I figured that had to be a no-brainer. But according to this article, the closing costs can easily exceed the savings, so you really have to make sure you nail down every single cost you’ll see both at closing and beyond. I don’t know about the HELOC thing since you refered to it as a second mortgage, but since you need to get rid of it anyway, I’m not sure how it’s relevant - unless you’re implying that the HARP loan would be an adjustable, but I’d hate to hear that’s even a possibility.

16

No, he doesn’t need to get rid of the second. He just has to start paying more than the interest - which anybody else loaning you money is going to expect too, so you are just going to have to suck it up there, or choose to default.
No, there is nothing “magical” about a fixed loan that will save you money over an adjustable rate loan. You only save money if your adjustable rate will ultimately go up higher than the fixed rate, and the longer that takes the higher over the fixed rate it has to go for you to be better off over sticking. I personally believe that the ARM will adjust such that you will never make up the additional 2.5% over the remaining 20 years of the loan. Especially when taking into account that most loans don’t go anywhere near the remaining 20 years without the property selling, someone dying, or refinancing. While that is speculation I’d certainly bet my own money on the existing adjustable rate over a fixed rate that much higher over the life of the loan.

17

Those are good points and perfect reasons to use the calculators at bankrate monitor or a similar site to run a few different scenarios so as to get a feel for some concrete examples.

18

http://www.calcxml.com/do/hom10
Here is a comparison calculator. Giving it a .5% increase every year makes the variable rate win over 10 years (and lose very slightly over 20). And frankly I’d bet against that much increase, especially in the short term where it matters the most. And that calculator assumes the same length for both loans, when IMO a same payment is more realistic- pay your existing loan with the same payment you would pay on a 6.75% loan and you’ll pay it off well before the fixed rate unless interest rates go up a lot more than .5% a year on the back end of the loan.

19

I don’t know about .5% - you do know that rates are up by a full point since May right?

edit: That’s on treasuries, I’m assuming mortgage rates followed.

20

ARM rates on an existing loan are based on a fixed percentage over some index. We’d have to know which one, but those can move a lot less than the rates you see on CNBC for new loans. If it is based on the prime rate, that last moved in 2008 (United States Prime Rate History). Others like LIBOR (London InterBank Offered Rate (LIBOR) History) or the CMT move more, but that calculation is assuming rates up .50%/yr and it never goes down.