Should I refinance my underwater mortgage?

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Dear Dr. Don,
I have an existing 5/1 adjustable-rate mortgage, and my house is underwater. My loan adjusted three years ago. Although my rate is low now, I want to refinance to a fixed rate, but I don’t have any equity in the home. My house is appraised at $310,000, but I owe $327,000.

I am planning to put more money down, so I can refinance into a 15-year mortgage. I still have 22 years and five months on my current underwater mortgage. Is this a good plan? I don’t have plans to move anywhere, and even if I put down the money, I still have at least one year of emergency fund savings.

— Mandy Mortgage

Dear Mandy,
The lender is going to want you to have a 20 percent equity position in order to refinance. If the house appraises at $310,000, then you need to come up with 20 percent of $310,000 ($62,000) plus the difference between the outstanding loan balance and the appraised value ($17,000). That works out to $79,000. Do you have that kind of money to put down on the refinancing?

If you don’t, then I’d suggest you try the Home Affordable Refinance Program, or HARP, if you qualify. It’s designed to help homeowners refinance if they have an underwater mortgage.

If you can afford the payments on a 15-year loan, then go ahead and capture the lower interest rate and interest savings. While you currently have a good rate on your underwater mortgage, a refinance out of an ARM and into a fixed-rate mortgage takes the risk of rising interest rates off the table. As I write this, Bankrate’s national average for a 15-year fixed-rate mortgage is 3.2 percent.

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