Save Money with a HARP-Refinance on an Investment Property with PMI

I don’t know if that title does the job to explain how I’m saving some money, but it was the best I could to explain it. Let me start at the beginning. I bought a condo in 2004, largely on the peer pressure of others who were fearful that if I didn’t get in the market, the sustained 6% inflation in the housing market would make it more and more difficult. After all 6% of $300,000 is $18,000, so if a property gets $18,000 more expensive every year, that’s a lot of catching up to do if you don’t already own. Of course that was 2004 logic, which as I now know was pretty silly. (Lesson for all, pay attention to what they say about historical prices not being indicative of the future.)

So I have this condo that I bought for nearly $300,000 at almost the market peak. I enjoyed what was unprecedented low interest rates with a 30-year fixed at 5.875%. I remember feeling like a total bad-ass with that rate… at least as bad-ass as one can be about a mortgage rate. Today, you can buy a near equivalent condo for around $180,000 and get a 4% interest rate (maybe even better). Welcome to Chumpsville… population: me.

I ended up marry my wife, who is in the military and job prospects drew us to San Francisco. This left me with two choices, sell the condo at a massive loss, or become a landlord. The second seemed to be the lessor of two evils. My thought was that maybe I can ride out the downturn or, worst case scenario, in 30 years I’ll own the property free and clear and have an income producing asset.

Having lived in Chumpsville long enough, I decided to call up my lender and see what they could do for me. I came to them as almost a perfect example of who shouldn’t get their interest lowered. I had three things going against me:

1. It’s an “investment property” – Having not lived in the condo for five years, it is technically classified as an investment property. (Some investment!) I couldn’t pull any heart-strings by claiming that military obligations moved us. Investment properties tend to carry higher interest rates.
2. I don’t have 20% equity – When I bought the home, I had 20% equity, but now that property values have dropped, I’m closer to around 15% equity and that’s with a very generous estimate on the value of the property.
3. No hardship – I’ve been responsible and I’ve made my payments. I can’t honestly claim that I’m in any kind of trouble of making payments.

Despite all this, I saw that 30-year fixed rates are under 4%, perhaps there’s an option for a responsible bloke like me to save some money. That’s when Chris, the lender on the other end of the line, said, “I think you’d qualify for one of our HARP-refinance programs. Let me look into it.” Turns out that I did qualify, and they were able to keep almost everything about my mortgage the same, but with a lower rate of 5.04%. It’s the sub-4% that I would have gotten if I lived there and had 20%, but doing the math it will save me $250 a month. There are closing costs that will run me a little more than $2000, so the move won’t actually pay off for 9 months. However, after that, it’s $250 extra dollars a month staying in my bank account. Not bad for a 20 minute phone call, right?

I figure that if I can refinance with all the strikes against me, it must be possible for nearly anyone to. You’ve really got nothing to lose by calling and asking.

I’ve set an appointment on my calendar for 12 months from now, to look at the equity again on the condo. If I get the 20% in and if interest rates stay low, there’s a chance, I could refinance again at under 4.50%… or at least that’s my hope. I might even think about going to a 15-year fixed mortgage at that time in an attempt to lower rates further. It will also force me to save more getting me that income producing property sooner rather than later. That’s getting a little ahead of myself for now.

What about you? Do you have mortgage with what would be considered a high interest rate in today’s terms? Have you made the call to try to get it reduced?