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I have had my first house for almost 3 years now. I have refinanced once already and I am about to refinance again. For this one I needed to get a new appraisal, which was expected. The only catch here is that the appraisal came in about 20% lower than my original purchase value.

This new value is rather close to what I owe on the house currently. I am able to knock my principal back down to 80%, but it feels like a losing battle. It's about half of my 1 year back up stash. Is there anything wrong with doing this? It seems like I will never have any equity at this rate...

I am refinancing from a 4.2%, 20 year loan to a 2.75%, 15 year loan.

Edits: The first refinance paid its self off after about 18 months and I have had it almost 2 years. This current one is a little trickier to figure out, but the closing cost would be covered in less than 20 months. I do intend to stay in the house as long as possible barring some special circumstance. 15 years is doubtful, but it is very possible I could be there for around 10. Considered trying to pay it off sooner, but very little reason to do so at that interest rate.

I guess owning my first house for almost 3 years and having to refinance twice and seeing the value drop like it has it a little jarring.

Details... Currently at 83k @ 4.2% for 20 years (~18 left), going to 72.4k @ 2.75% for 15 years. Monthly is going to drop from $542 to $490. Refinance cost is $800 + $300 for the appraisal (which should more than pay itself off from my tax protest this year).

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    I think you forgot the most important info - do you plan on being in this house in 15 years? Also, not counting the new equity dump, what is the break-even point after all the closing costs? 18 months? 6? – Aaron D. Marasco Aug 21 '12 at 21:34
  • Also, what is you biggest concern? Is it just that your home is losing money, or is there a bigger picture. We need some more details to give you the best answer possible. – MrChrister Aug 21 '12 at 22:14
  • Has there been enough time to recover the costs of the first refinance? – mhoran_psprep Aug 22 '12 at 11:08
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    It is jarring to see your house drop in value, but that is because the estimations of the value of the home cannot take into a account your need and desire for the house. If you have a home you like and enjoy being in, that is probably more important than the street value. Even more so if you are not trying to sell it anytime soon. – MrChrister Aug 22 '12 at 17:51
  • Hi radix, can you clarify the question you actually want answered? Are you looking for a way to stop your house value from falling, or whether it's a good idea to refi, or something else??? – C. Ross Aug 24 '12 at 12:19
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The new refi would save you 1.45%. I understand not wanting to draw down your savings, and of course, that needs to be part of the decision. The return on borrowing that money is both the interest saved on the whole mortgage along with saved PMI. Let me go abstract a moment - "what guaranteed rate would you need to see to prompt you to take half your cash savings and invest it for a fixed 10 year term?" Keep in mind, there's a distinction between cash flow and true savings. Because you are dropping the term, your payment will probably go up, even though you are actually better off.

Edit, now that OP added numbers. The savings is nearly $1100 the first year. 72k * 1.45%. Cash flow improves due to pay down, too, so that's a plus.

Additional thought - the savings from a refi is not linear. Even though many answers to refi questions in general will say "$X/mo is the savings" it's simple to show why that may be true from cash flow, the true savings is different, as on day one the 1% (for example) lower rate results in $1000 per year on a $100,000 mortgage, but in the last year, when the balance might be sub $10K, the 1% is less than $100. This is why I prefer to focus here on break even.

  • That last calculation seems overly simplified, but makes sense for the first year at least. That covers all of the closing cost in the first year and brings in an extra $600 per year in cash. Stocks may give a better return, but I am leveraging much more cash and feel more comfortable with this option. – radix07 Aug 22 '12 at 15:14
  • There are times my "back of napkin" is within a few percent of the precise answer. And there are times a sophisticated, correct, reply actually confuses the issue. Your break even is about a year. Your cash flow would take a long time to replace the funds, but aiming to kill a mortgage in 15 years sounds good to me. – JoeTaxpayer Aug 22 '12 at 16:10
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People refinance the homes for a variety of reasons:

  • Reduce the monthly payment due to a lower rate.
  • Move from a adjustable loan or a loan with a balloon payment to a fixed rate loan.
  • Remove somebody (a former spouse or co-signer) from the current mortgage.
  • Keep the payment the same or lower and cash in some of the gains. This extra money is then used to renovate the home, pay for college, or buy a new car.
  • Speedup the payoff of the loan without a big change in the monthly payment.
  • Some combination of more than one of these.

Without specific numbers to show that your payment will be greatly reduced it is not clear why you want to take some savings / emergency funds to make this work. How much more would a loan with PMI be per month?

If you can reduce the payment by $200 / month but it will take $10000 to reduce the loan amount to 80% of the value that will mean that for the next 4 years you will be exposed while building up the emergency fund again. This is in addition to the other closing costs for the new loan.

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