Vanished equity will sink refinance hopes

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Dear Dr. Don,
My husband and I have a refinance question. We purchased our Seattle area condo during the boom in 2006. We financed 100 percent of the purchase via an 80/20 loan. 80 percent was financed as our primary mortgage as a 30-year conventional loan at 6.125 percent interest. Meanwhile, 20 percent was financed as a secondary loan at 8.5 percent interest amortized over 30 years but due in 15 years with a balloon payment.

Since then, our home has gone down in value substantially … about 20 percent to 25 percent. We are completely upside down in our mortgage.

We can afford the payments and have an excellent credit score, but want to know if we can take advantage of the low interest rates on mortgages these days by refinancing our second mortgage. I don’t believe we will be able to refinance both our loans into one single loan because we owe more than the home is worth, but I wanted to know if we can refinance only the second loan. Changing it to a conventional mortgage of 15 or 30 years without a balloon payment would be great.

Can you let me know what our options are? I’ve searched all over the Internet and can’t seem to find anything dealing with refinancing only the second mortgage.
— Jenelle Jericho

Dear Jenelle,
A mortgage, whether it’s a first mortgage or a second mortgage, is backed by the equity in the property. If your home is worth less than the outstanding balance on the first mortgage, you’re not going to have any luck finding a refinance lender willing to refinance your second mortgage.

You’d be asking a new lender to take out an unsecured loan on your property. You’re not going to get today’s market rates on a second mortgage, no matter how good your credit, on an unsecured loan.

If it’s any consolation, Bankrate’s national average for home equity loans is 7.75 percent at the time of this writing. While it’s not inconsequential, you’re not seeing a huge differential between the 8.5 percent on your existing second mortgage and current market rates.

The passage of time, along with any additional principal payments you can afford to make on the mortgage, will get you to where you need to be to refinance the mortgage well before the balloon payment comes due.

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