Refinance with High Combined LTV Ratio
In keeping with the refinance theme…. I’m still trying to refinance my mortgage. My most recent obstacle is a poor Loan-to-Value (LTV) ratio. With the failing economy, my home is worth about 10K – 15K less than when we purchased. That ups my combined LTV ratio to about 90%! But, I spoke with a different loan officer today and am optimistic about still being able to take advantage of the amazing interest rates.
My Mortgage
Here is a quick summary of my current mortgage scenario. Jocie and I purchased our lovely townhouse about three years ago. We couldn’t put 20% down but wanted to avoid paying private mortgage insurance (PMI). So we broke the mortgage down into two loans. The primary loan is a 30 year fixed for the bulk of the mortgage with an interest rate of 6.125%. The secondary loan is a 15 year fixed for a smaller portion with a higher interest rate of 8.125%.
Refinance and Subordinate
Here’s the game plan so far. Refinance the primary loan and leave the second loan as is. With such a high combined LTV ratio it’s really tough to find a lender who will assume the risk of both loans. Focusing on the primary loan makes it more appealing for lenders and allows me to go through with the refi. It’s not the best situation as I’ll take a slightly higher rate (about 5%) because of the second loan, but I avoid PMI and will save money in the long run. The only catch is that the secondary lender needs to agree to subordinate their loan.
What Does it Mean to Subordinate a Home Loan?
Think of my two loans as a pecking order for taking over my home. If I default on my payments, the primary loan gets priority. If I pay off the first loan, the secondary loan moves up in line.
Refinancing basically means paying off one loan and starting a new one. So for the current plan to work, the secondary loan would have to agree to remain subordinate (maintain lien position) while a new primary loan was created. This request has to take place because the both lenders agreed to loan money under a specific set of conditions. Since I’m trying to change these conditions, they have to reassess my ability to repay their loan.
The secondary lender is likely to agree since their loan doesn’t change and a better primary loan interest rate means I’ll likely be better able to pay everyone involved. Most lenders require a fee to cover the cost of reviewing the request. But again, I have to think long term.
What do you think? Ever request subordination of a loan? How’s your refi going?
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3 Responses to Refinance with High Combined LTV Ratio
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March 26th, 2009 11:28 am
Ethan,
Just as we were getting psyched up to refinance, we got our “Notice of Adjustable Rate adjustment” yesterday. It’s going from 4.5% to 3.5%!
It’s so hard to decide if we want to refinance…. What do you think?
Planning on staying about 5-10 more years… the adjusted rate can go up a max. of 1%/year. Capping out at 9.5%. We’d also be in the situation with needing to subordinate the home equity loan to the new mortgage, since we probably only have 10% equity.
Beth
March 26th, 2009 7:40 pm
Beth, wow! 3.5% is tough to beat! I think in the 5 year window its a really tough call. We saw how adjustable rate mortgages were going up as short as 6 months ago before the Government has gotten really serious about keeping rates down.
I think we’ll probably see rates remain relatively low for the next 12 months, but after that, its really tough to predict if / how fast they will rise. If they stay very low for 12 months, you could have 3 years before your loan gets back to 5.5%. If you’re only planning to stay 5 years, you’d only be looking at 2 years of risk altogether. If you’re staying for 10, that’s a different story…
My take would be to seriously shop around. I heard from another friend at work today that it is possible (although difficult) to get a 4% fixed rate loan on some promotional offers with no points and no origination! That’s inspiring me to look around to refinance again. If I could get 4% fixed, I’d do it in a heartbeat, even though we just refinanced. Even if you could get 4.25% fixed, that’s only 3/4 of a point for the security of a fixed payment…
Fred
September 20th, 2009 9:23 pm
When your adjustable rate notice appears definitely go get a fixed rate loan, especially right now while rates are still low. I was in the mortgage biz and would always recommend going fixed as soon as you were able to without penalty. You will have piece of mind and you will still have a great rate. You will be able to budget your biggest monthly expense without worrying it going up in the future or worrying about another refi later.
Some states do have pre-payment penalties on adjustable or hybrid loans. So if you get 3.5% for a new term of adjustable years, who knows what the rates will be when that term is up? Do you want to pay penalties if rates start climbing and then you decide you want to go fixed? The rates right now are marvelous. Get one while the getting is good.