The Question: In Tuesday’s post about what to do with my raise, I mentioned that our mortgage is at a 6% APR. Naturally, one of the first questions I was asked was why in the world don’t we refinance our mortgage? Considering current interest rates, we could be saving a ton.

I’ll be honest. I would love to refinance our house, but right now, it just is not a viable option. We are paying for our past financial mistakes.

 

Our History: We bought our first house in summer 2003. We started getting credit card offers, and we took advantage of them. When we sold that house in early 2005, we sold it at a profit. We had money that could go toward the down payment of our new house, but we also had pretty significant credit card debt. Our new lender, instead of asking for more down payment decided they would instead make it a requirement of our loan that we use money from the sale of our first house to pay off the credit cards. That was fine with us, as we knew we had gotten in over our heads.

6% was not the prime rate, even then, but we were not prime customers, and it was still pretty good.

We live in the house we bought in 2005. At the time, the sale price was $241,950. We put less than 3% down. We paid PMI. In the summer of 2007, after having paid PMI for two years, we were allowed by the terms of our mortgage to have the house value reassessed to determine if we still had PMI. By that time, the value of our home had risen to over $300k and the PMI was gone.

A house just about a block away from us, that was a total fixer, had just sold for around $300k as someone’s flip project. The 800 square foot house next door was bought by a developer, knocked down, and a mini-Taj Mahal was being built next door to us. Everything looked rosy. We all know how that turned out.

Our Present: The house around the corner that had sold as a flip for $300k went into foreclosure. It sold at the end of 2011 for $77,000. The Taj Mahal next door was meant to be a million dollar property, but it was finished just as the market started to tank. It was purchased for $850k. Zillow puts its current value at $538k. Chase (my lender) puts its value at $424k.

As for our house, Chase estimates its value at $205k. Zillow is much less generous and estimates it is worth $165k. We still owe $207k.

While we could pay down the principle to get to what our lender thinks the house is worth, we would not be able to refinance without paying PMI again. The days of the 80% mortgage, 20% home equity loan (which is how we bought our first house) are gone.

PMI would pretty much eat up every bit of savings we’d get from a lower interest rate, and if you add closing costs to the equation, well, we do not come out ahead, at least not for a long while.

But, my home loan savvy readers might say, you are the perfect candidate for HARP. It is for owners like you- not behind on payments or anything, but a program to let you refinance to today’s great rates where, if you are not currently paying PMI, you do not have to start. In fact, HARP was recently re-written to allow underwater homeowners to be able to access it too.

The problem here is that to qualify for HARP, your mortgage must be owned by Fannie or Freddie. Our loan is not. In fact, it cannot be.

Go back to 2005. Our mortgage agent with Chase was also a family friend. Even at that time, she was noticing a disturbing trend of mortgages being packaged and sold, and she had heard numerous complaints about companies like Country Wide, which were doing a lot of the buying. So, in order to protect us, she wrote a clause into our mortgage saying that Chase cannot sell it. I think overall, this has been a great benefit to us, but right now, it kind of screws us.

Our Future: So here we are, with interest rates of 6% on home we’re at least a little underwater on, and no chance of refinancing without PMI. I would like to say that the Seattle housing market is going back up or even just stabilizing. In fact, there was an article on MSN just last week claiming that Seattle is a market with slim pickings, where prices and competition for houses is rising again. It lies. I’ve been tracking the Seattle market for a few years now (I love looking at houses), and the truth is, in the really desirable neighborhoods, where prices really did not fall that much, houses are still sitting on the market for quite a while. In the more affordable neighborhoods (like mine) prices are rock bottom and houses still sit on the market for quite some time. According to Zillow, the estimate on my house has dropped by $30k just since January.

What that means is that I cannot count on paying PMI for just two years and having my house reappraised to get rid of it, even if we make substantial improvements.

We are not hurting. By getting rid of the PMI and shopping around for better insurance, we now pay $200/month less on our mortgage payment than when we did when we bought the house. In addition, we are actually paying more “extra” toward the balance than we were when we had the higher house payment. We have never missed a payment or even been late (auto-debit) and have never even been concerned that we would not be able to make our payment.

Yes, it would be nice to be paying less interest. It would be nice to have some extra money right now to save toward adoption/future child expenses. But we do not need the money. So, we will keep making our payments. We will watch the market, and maybe in a few years, we will refinance. Or maybe not.