Take my case for instance. When I bought my condo 5 years ago, I paid $290K for it, and at the peak of the market, its value approached $475K, but right now, it’s value is only appraising at about $250K. This sucks, because in order to refinance, I can only borrow 80% of my homes equity, or $200K if my home appraised at $250K exactly. The banks don’t take into consideration that I’ve been on time with ever mortgage payment over the last 5 years, and that I’ve even made extra principal payments in some of those years in order to accelerate my mortgage.

If you have enough equity in your house, now is the time to refinance, but if your home value has dropped, as most homes in the Southern California area have over the past year, you just may find yourself in a situation similar to mine – having your home refinance denied. It’s a very unfortunate situation when someone like myself who takes pride in having great credit has a refinance declined because of the current state of the market.

I’m currently looking at a couple other options that will help me get refinanced, and I’ll keep you all posted if I find a way to lower my interest rate.

1. Are current rates lower than your existing mortgage rate?

This should be a no-brainer, but you’d be surprised how many people actually refinance just to pull some extra equity out of their homes. Another thing that should be considered when looking at the new rate is whether the amount you have to pay in closing costs will offset the savings that your new, lower rate will get you. If your closing costs are too high, it may be best to just keep your existing mortgage.

2. Where does the break-even point turn into savings?

As mentioned above, the closing cost will many times eat into your savings, but if you’re able to lower the rate enough, how long will it take to recoup the closing cost? If the closing cost will be recouped by savings in less than a year, refinancing is probably a good option, however if it will take you 3-5 years or longer to recoup your closing costs with mortgage savings, you should probably consider a few things:

• How long do you plan to stay in your home?
• Are there other lenders who will offer better incentives?

3. Shop around prior to selecting a refinancing option.

There isn’t just one lender out there. Make sure you shop around and have a good idea of current rates prior to selecting your refinancing option. You wouldn’t go buy a car without doing your research first, would you? In most cases, no… you’ll want to first know what other people are paying for that car, and what financing options and incentives are available.

4. Get a rate lock

This will give you time to shop around while knowing that you have a specified rate in mind. Don’t let this be verbal, get a rate lock in writing. This will specify the length of time that you have to secure the loan at a specified rate, as well as other information about the loan.

5. Get a good faith estimate

Typically, lenders will provide you with a good faith estimate after you have filled out your loan application paperwork. Good faith estimates disclose all costs and fees, and these will allow you to compare the loan to your current loan, and other potential loans.

My first loan, the 3/6 ARM, adjusted to its maximum amount of 6.75% after its first adjustment period, and interest rates were still low, so I figured that it’d be a good time to combine and get into a fixed rate loan. I refinanced through Axcess Real Estate and combined both loans into one and decided to add an escrow account too. My new payment is $1,791/month, about $300 of that goes into my escrow account for property taxes. All in all, I’m looking at about $1,500/month for my new mortgage payment, as compared to the $1,250 that I previously had with my 3.125% 3/6 arm and my 15-year 2nd.

I’m going to walk you through the type of loans that I got, but keep in mind that I purchased my condo at the beginning of the upward spike in housing prices. When I bought in June of 2003, I’ll be honest, I thought I was paying way too much for a 2 bedroom, 2 bathroom condo, but if you ask me now, I’ll tell you that I bought at the perfect time. When I bought, I would have never imagined that the price of my condo would nearly double in the next 3 years, which it did, along with most other housing prices in both Southern California and across the United States. The price of my condo has fallen since the peak of the real estate spike in 2006, but if I were to sell today, I’d still be able to take quite a bit of equity with me. The thing to keep in mind while reading this article is that I was able to “weather the storm” and survive with my mortgage while many homes (both in my area, and around the United States) were falling into foreclosure.

I bought this condo for $290,000 with 10% down and 2 loans. My realtor was able to keep me out of having to pay PMI somehow by getting a 10% loan in addition to my primary 80% loan, which I’m thankful for to this day. My 10% loan was at a fairly standard rate of about 6% (I can’t recall now and don’t want to dig up the paperwork) so my payment on that was a little less than $200 per month. Now, my primary loan was the loan that could really get me into a lot of trouble, and it was loans like this one that did get many people into trouble. My primary loan was for 80% of the selling price – $232,000 and it was a 3/6 ARM. An ARM is an Adjustable Rate Mortgage and you can read about My Adjustable Rate Mortgage here if you’d like to read my post to get more details. Basically, a 3/6 ARM will stay at a starting rate for 3 years, then after 3 years it will adjust, and will also adjust every 6 months after that. So here’s the deal, with my 3/6 ARM, I got an initial interest rate of 3.275% through IndyMac Bank and my initial monthly payments were $1,017.25 – When combined with my 10% loan, I had a total monthly payment of less than $1,250 and I knew that my monthly payments should have been somewhere closer to $1,650+ per month on an 80% loan, and about $1,850+ on a 90% loan (which I had).

The Mortgage Crunch
When I purchased my condo in 2003, there were all sorts of clever loan programs that would allow people to purchase homes that were way beyond their means, and the problem was that most people just didn’t understand what they were getting themselves into. I think this is where most people got into trouble was in not realizing that they were eventually going to have to pay the adjusted rate on their Adjustable Rate Mortgage. That’s where I differed from most borrowers and first time home buyers. I approached the situation with the attitude “how good of a deal can I get for the first 3-5 years”, whereas others simply asked, “how big of a house can I possibly get into”. Many of those who stretched their income to the max to get into the best and biggest houses are now either out of the house through foreclosure, or struggling to make ends meet.