Refinancing Out of A Negative Amortization Loan Before The Penalty Expires

HI, My name is DELETED and my husband and I are searching for a way to get out of our Negative ARM loan before we get upside down.

Our problem right now is our loan to value. Our loan right now is at $547,367.80 and is only getting higher. Our house just appraised at $620,000.00. We have a prepayment penalty of $20,000.00 and would just like to get that covered. We feel we need a Jumbo loan if possible.

Our wish is to get into a 40 or 50 year fixed. My husband makes good money and I will be working in a couple of months making a decent income. Right now I am doing temp work. We can afford payments for our mortgage if we were to refinance but we are having a hard time finding someone who will take the risk with us. If there is a risk. We are just trying to get out of this loan that is going to end up taking our house from underneath us. Our credit is good and I feel there is a way something can be worked out

Can you help us?

I will try, if you're in California. First, let's stop and think a minute about your situation and what will benefit your pocketbook, rather than mine.

If you pay the penalty, your new loan is going to be approximately $570,000, even without points, something I truthfully don't think is going to happen the way jumbo rates are. Neither I nor any other loan provider can get you a loan that isn't available. $580,000 is more likely, considering prepaid interest, etcetera, unless you have some cash to pay it down. $570k and $580k are both within the band of 90 to 95%, so I have to price it as a 95% loan to value ratio.

But what if you don't have to pay the penalty? Now staying at or below 90% loan to value is a real possibility, and the loan can be priced as a 90% loan, giving better trade-offs. The way we might be able to do this is to check if we can get your current lender to refinance you. It'll likely mean renewing your prepayment penalty, but better that than paying $20,000 in penalty. Even if you end up with a higher rate than you might otherwise get because your lender doesn't have the lowest rates, $20,000 is almost four percent of your loan amount. Over the course of the 3 years of the new prepayment penalty (since that's standard for negative amortization loans), you'd have to save over a percent per year to break even with another lender. As I said in "Getting Out of Paying Pre-Payment Penalties", sometimes lenders will not require you to pay a penalty if you refinance with them and accept a new penalty.

In short, if we check with your current lender first, we might save you $20,000 cash plus the interest on it. So let's figure out who your lender is and ask.

The second alternative is to find out how long until the penalty expires. Make at least the interest only payments every month until your payment expires. How long do you have left on the penalty? If you've only got six months or a year left, rates just aren't low enough to make it worth your while refinancing right now, especially Jumbo loans, which even if your loan to value ratio was below 80% would still cost you nearly two points for a 7% loan. If you pay at least the interest only payment, you're not getting in any deeper. When the penalty expires, maybe rates and the market will be in better shape and you'll get a better loan. Matter of fact, with the current mostly psychological meltdown in the loan market, it's a moderately good bet, especially as opposed to just flushing $20,000 paying that penalty. If you have less than a year left on the penalty, I strongly urge you to make the interest only payments (or more), and come back to me about three weeks before it expires. From that point, by the time I can get your new loan funded, the penalty will have expired.

Even if you're only six months into your loan, we'd have to save you about about 1.5% on the rate for you to come out ahead by paying that penalty. $20,000 times 12/6 divided by $547,000 gives a current rate of 7.3%. As you'll see, a blended rate of 6.67 is about as low as I can get for this situation. Your rate would have to be at least 8.2% now for paying that penalty to be in your best interest.

The loan market today is a very different creature than it was a few months ago. Let's look at the alternatives, assuming your lender will waive prepayment with a new loan. Even so, let's look at a loan amount of $558,000, which is about where you're going to be with closing costs and one point.

At 90% CLTV, I currently have a 30 year fixed rate loan at 7.375%, with PMI of about 0.7% on top of that. At $558,000. Payment would be about $4180, of which roughly $325 is PMI, $425 is principal, and $3430 is straight interest. Real cost of the loan would be roughly $3755 per month. Even if I could get you a 40 year amortization at the same rate, the payment would be $3945, and at 50, the payment would be $3843.

Or we could split the loan into a 80% 30 year fixed rate first at 7.375 without PMI and a 10% second at 8.55%. Payment on the first, about $3426, of which $3048 is interest and $377 is principal (numbers don't add due to rounding to the nearest dollar). On that 30/15 second of roughly $62,000, the payment would be $479 and the interest $442 while the principal is $37. Real cost of the loan, roughly $3490 per month, $265 less, and more of it is likely to be tax deductible. Plus, in terms of payment, I've saved you more than the difference between the thirty and forty year amortization, and almost the difference between the thirty and fifty year amortization.

Or, we could split the loan into a conforming first at $417,000 with a $141,000 second, again on a 30/15. Now that first mortgage is at 6.125%, for a payment of $2534, of which $2128 is interest and $405 is principal. The rate on the second drops also, to 8.3%. Payment, $1064, of which $975 is interest and $89 is principal. Real cost of this loan, $3103 per month, and the total payment is only $3598, another $307 per month less than the second alternative and $582 less than the first alternative.

Before I close, it occurs to me to ask if you are actually able to make those payments. Because the fact is that you owe $547,000 right now, and that's a cold hard fact that nobody is going to change. Quite often, people get put into negative amortization loans because that's the only way they're going to make the payment on that much debt. If you cannot realistically make these payments, delaying the inevitable will only cost you more. As things sit, you might come away with a few thousand dollars if you sold now, and then you can buy something you can really afford. If you wait, things are going to get worse, and you're going to end up with a short payoff and a 1099 love note that says you owe taxes, plus maybe a deficiency judgment, having your credit ruined, and still not having the home of your dreams. This doesn't make me popular right now, but what people like you are going through now is the result of people in my professions who wanted to be rich and popular, rather than actually doing what was best for the clients. Were I in your shoes, I'd likely be asking a lawyer if there's some liability on the part of your lender and real estate agent.

Caveat Emptor