Stop paying your mortgage to lower your interest rate?

Question

A few days ago I called my bank and ask them what will take to refinance my primary home mortgage. They said that advertised lower interest rates are only available for new clients and they don't recommend me to refinance.

My mortgage has an interest of 5.87% which is very high compared to their advertise price. A real estate friend, recommended me to miss 2-3 payments of the mortgage, and that will trigger loss mitigation department at the bank to offer me a lower rate without the closing costs.

I am not sold on the idea for various reasons:

(1) I have cash in saving accounts, so the bank first reaction will be to check my bank balances.

(2) I have excellent credit score - I will probably take a big hit

(3) It does not seem right

On the other hand, the bank is telling me to keep paying this big rate, while my house is undervaluation. For them is a win-win, but for me is a lose-lose.

UPDATE: House Value: 139,000
Original Loan: 144,500 (because house value was a lot more)
Balance: 129,000
Current payment: $900/m
Loan Type: Conventional without PMI
Term: 30 years
Start of Loan: 03/18/2005

Answer 1

A 30 yr 4% loan for $111,200 will cost you $531/mo. $5640 better cash flow. The issue, of course is that to get a 80% loan to value, you need to put in $18,000 which isn't a small amount. On the other hand, you'd replace it in just over 3 years even with no other money coming in.

(Somewhere in here, I'd suggest a 401(k) loan, it would be about $330/mo for 5 years, and you could pay it faster if you wish. Many are very anti-401(k)-loan, and I take no issue with them, this is an option, not rigth for all.)

It looks like you have about 20 years left, so the numbers I showed are not all savings, some is from going back to a 30. Depending on your desires, I'd then flip to accelerating the payments once your savings are replenished.

That said, there are efforts underway to help homeowners refinance with no PMI and no need to pay down the balance. I recently refinanced a rental property at just over 4% under the HARP program, with a single fee of $800.

I don't recommend taking your friend's advice. Whether it works or not, your credit report/score will take a hit that will remain for 7 years. If you decide to move during that time, you will have issues getting another loan. Go to a game with him, go drinking, but anything he suggests about money, I'd nod and forget it immediately. It's as bad as advice gets.

Answer 2

I would talk to a mortgage officer or home refinance expert, not to your current bank. Your lender obviously has no interest in helping you refinance, but if you shop around you will find people who have more interest in helping you and who have access to more resources, more programs, and more lenders.

You say you are in Puerto Rico so I don't know if this will help, but I also wanted to mention the HARP program (Home Affordable Refinance Program), under which you can refi without PMI even if your loan balance slightly exceeds your home value.

The main point is shop around: there are lots of programs out there, and with rates around 4%, you can see some big savings.

And I also echo the advice not to stop making mortgage payments. I have even heard of some lenders advising people to do this, and telling them they would put them in loan modification programs, only to foreclose on them months later and deny all appeals. You don't want to risk this.

Answer 3

Those low rates apply likely only to loans which are less than 80% of home value (assuming 20% down payment).

You may consider talking to a different bank, and use a clever suggestion I got from a mortgage expert: get TWO loans: loan with lower rate for 80% or the value of the house, and second lien loan for the rest (if you don't have money for 20% down-payment).

Second lien could be from the same bank, but will be with higher rate, because is more risky: if something goes wrong, second lien bank is second in the line for any money.

Then, you pay any extra money (including money you saved from rate difference) towards paying down second lien.

After paying down second lien loan, you may consider converting it to HELOC (Home Equity loan) so you have extra buffer. If you have no balance, should cost like $50 a year.