A Real Estate Conundrum

Mortgage interest rates have been dropping as a result of the ongoing credit mess, and the latest government intervention. That's provided a possibility of refinancing for many people stuck in high interest rate mortgages.

Therein lies a problem.

I have a fixed rate mortgage and inquired about refinancing yesterday, but ran into a problem that many other people will find.

With the actual value of the real estate owned lower than it was when it was purchased, it sets up a situation wherein people might not be able to refinance without taking on PMI because they do not have 20% down, based on the current value.

This will especially hit those who bought homes within the past three years, even if the homes were bought with 20% down. Since most of the mortgage payments goes to paying interest, principle doesn't get reduced much in the first years of repayment. So, if you refinance the mortgage, even using the same criteria as when originally made (30 years, fixed rate, no points), you're going to have to pony up additional money to assure that you do not have to pay PMI.

Here's a hypothetical to show the problem. A home originally bought for $450,000 at 6.75% and 20% down one year ago would mean that $90,000 was used as a down payment and the mortgage was for $360,000. Monthly payments would be in the range of $2,300 (principal plus interest)

Today, if you tried to refinance for 5.75%, you would likely find that the value of the home isn't $450,000, but 10% lower (here in Central Bergen County) - $405,000. The new mortgage would be for roughly $358,000 (taking into account the year's worth of principal repaid). That $358,000 is more than 80% of the value of the property, which means that you would fall into a trap where you would need to increase the amount for down payment to get above 20% or incur PMI. Many people simply don't have the money available to make that happen or don't want to risk putting more money into the property to get a modest benefit from the rate changes.

That makes it very difficult for many people to consider refinancing at the present time precisely because the real estate values have declined.

It's a situation that is even worse in many parts of the country that have seen real estate values decline by even steeper percentages.

Of course, the federal government is looking to help people who are in distressed mortgages by enabling them to rewrite the terms of their mortgages, but if you played by the rules and are current with your payments, you're going to find that you can't benefit from the lower interest rates at the present time.