I don’t often write about money matters, since I am by no means an expert (in fact, most of my friends would probably recommend that you run away if I start to offer financial advice), but there are a lot of people out there who are in the same boat that we are in (where your home has declined in value over the past 2 years) and I wanted to provide some information that many of you might know already, but in case you didn’t it might be able to help you out.

The basics of our circumstances: We want to refinance our house to take advantage of lower interest rates, but because of the decline in its value over the past few years, I did not think we’d qualify for refinancing without paying PMI (or worse, if the house happened to be worth less than what we owe right now, we’d be out of luck, PMI or not). I found out that this might not be the case since some pretty important rules have changed. If you happen to have a similar situation then read on to find out how you might still be able to refinance at a lower rate.

Right now we have a 30yr fixed rate mortgage at 6.375%. Not a great rate, but not too bad either. We also have a home-equity loan (we didn’t get to have fun with this money, it bought a new roof, new furnace, landscaping and paid off a high-interest car loan). This has a rate of almost 8%  and a term of 10 years. When we got that loan, I didn’t worry much about the high rate, since I had bonuses owed to me that would have covered almost the entire principal, so I thought I’d pay the whole thing off long in advance. As always, the world doesn’t work according to plans and that money was spent elsewhere, so we are stuck with this loan and this crappy interest rate.

Interest rates are pretty low right now, you can find good 30 yr fixed rate mortgages with interest rates of less than 5.5% (I’ve even seen some for less than 5%) so my plan would be to take our primary mortgage and the secondary mortgage and roll them into a single loan. If you consider that the average of our two current rates is about 7%, we could save a pretty substantial sum every month if we could get the rate down to anywhere between 5 and 5.75%.

So what’s the problem?
The problem is of course the value of the house. Welcome to 2009 – I don’t need to go into the fact that we’ve all gotten the screwing of a lifetime in terms of real-estate values and many people now have homes that are worth less than the amount owed. For this reason, I’ve been procrastinating on pursuing a refinance to take advantage of the lower rates. I was worried that our home has lost so much value that we wouldn’t be able to meet the traditional 20% equity threshold that would usually be required to refinance and I didn’t want to mess with other funds like retirement money or savings to make up the difference.

But there seems to be good news out there for people like us. The bottom line is this – through the government’s “Making Home Affordable” program – you may be able to refinance your home as long as the balance on your primary mortgage does not exceed 125% of your home’s value.

To put that into perspective, consider this – we’ll assume that a home has lost quite a bit of value, but it is still in a desirable location, you intend to be there for awhile and you believe that the value of the home will ultimately rebound, so you want to go ahead and refinance.

Assume that the amount owed on the home is:  $300k.
In the “old-world” of 20% equity, in order to refinance,  your home would need to be worth: $360K.

This requirement goes away under the Making Home Affordable program, so lets look at how far down the value of this home could go before it is no longer eligible for refinancing.

Assume that the value is $275k, you would have a loan to value (LTV) ratio of 109% =  qualify.
Assume that the value is $250k, your LTV would be 120% = qualify.
Assume that the value is $225k, your LTV would be 133% = does NOT qualify.

The lowest that a home could be valued against a $300k loan and still qualify for this program would be: $240k (240 x 1.25 = 300 )

Remember these calculations factor in the amount owed on your PRIMARY mortgage, from what I can tell, your secondary mortgage is not factored in. You can find an LTV calculator here to run the numbers on your own loan.

Before you go thinking that you need to run out and refinance your place right away, there are other things to consider. First of all, if your house has lost so much value that it is worth far less than what you owe and if you live in an area where home prices are not likely to rebound for a long time, refinancing might not be enough to solve your problems. Second – this is still a refinancing, so your credit score  and ability to pay will matter (even more now than it did a few years ago) which means you may not qualify for the best rates. If you are having trouble making monthly payments and have gotten behind, there might be other options that would be more helpful to you. The Making Home Affordable site goes into those. There are also closing costs and other fees to consider. You can usually roll those into the loan, but this may not be desirable, so you might need to have cash to handle that.

All that being said, if you are like me and you think you could do quite a bit better on your interest rate, and the value of your home falls into the 125% threshold, it is at least worth your time to investigate the possibility. Saving yourself a few hundred extra dollars per month would be a big help for many people these days. I’m certainly not going to complain about it.

More info about Making Home Affordable