Can we refinance without much home equity?May 10, 2012: 5:05 AM ET
We have a second conventional mortgage on our primary (and only) home. When we purchased it, we used an 85-15-5 loan breakdown. We have since refinanced the primary mortgage, but are paying 8.4% on the second. Our loan-to-value ratio is too high to refinance the second loan and, since we are not facing a financial hardship, we are not eligible for a loan modification. What other options do we have for reducing what is now an absurdly high interest rate? –K.G., Zion Crossroads, Va.
Based on the numbers above, it looks as though you put 5% down and borrowed 100% of your home's value in two separate loans—one for 85% of the home's value and one for 15%. Unfortunately, the lack of equity now puts you in a tough spot. You have no bargaining chips—especially since the holder of the second loan is typically second in line to get any money if you default, making it the riskier re-fi. "Sure, 8.4% is twice as much as the typical refinance in today's market," says Lee Munson, a financial planner in Albuquerque. "But why should any lender offer you a better rate when you have nothing to collateralize it with?"
In short, you're stuck unless you can come up with some cash to pay down your mortgage. The silver lining is that this second loan is for only 15% of your home's value, so it's not inconceivable that you could pay it off quickly. Another option: a family refinance. "Maybe you could work a deal out with a family member, or somebody else who'd want to pick up the secondary loan," says Burt Hutchinson, a financial planner in Wilmington, Del. For instance, if your parents are eking out a tiny return on their savings, they might be willing to lend you the cash at 4% or 5%. They earn more and you pay less. Everyone wins.
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