Dear Dr. Don,
I live in a condominium that I purchased in 2006. The purchase price of this unit was $83,000. I financed the condo using an 80-20 loan with no money down, borrowing $66,400 at 7 percent on the first mortgage and simultaneously taking out a second mortgage for $16,600 at 9.12 percent fixed.

The combined loan balance is now $77,730. The 80-20 loan allowed me to avoid paying private mortgage insurance.

Four years have passed and I am still working full time, but in a new job. My annual salary has doubled ($60,000) and these mortgages are my only debts. Meanwhile, the condo’s value has dropped almost in half to an estimated $43,780. My fiancee and I want to get married soon, and I’m hoping to put my condo up for sale so we can move into a house.

So my questions are:

  • If we decide to stay in my condo for a while (until its value goes back up), should I try to get a lower mortgage rate or just keep my current loan?
  • If I try to sell my condo with its current appraised value of $43,780, will I have to owe the lender difference? This, in my case, is $33,950! The drop in value is just not fair to owners who always make mortgage payments on time!

— Marty Morass

Dear Marty,
It’ll be very difficult to find a lender willing to refinance these loans given how far underwater you are on the loans. Because you’re not having a problem making the payments, it doesn’t look like you are eligible for the Home Affordable Modification Program, or HAMP, or the Home Affordable Foreclosure Alternatives, or HAFA, program. You can research this yourself at the Making Home Affordable website.

You could pursue a “short sale” strategy outside of HAFA, where you try to get the lenders to accept a buyer’s offer a payment in full on your loans. But a short sale strategy is very hard to accomplish when the second mortgage lender is expected to take a complete loss on that loan.

You could walk away from the condo, but the resulting hit to your credit report is going to make finding financing for a new home next to impossible for several years. People who walk away from their homes often end up renting while they wait for their credit history to recover.

I’d suggest working on paying down your second mortgage by making additional principal payments to that mortgage. You’ll be building equity and getting out from under a 9 percent mortgage rate.

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