Underwater without a Drop to Drink

Over the past few months, talk of the US debt crisis has got me thinking: how does all this effect me? As it turns out, more than you might think.

Here’s how my little brain traveled from the hell-in-a-handbasket news from the US government to me trying my hand at refinancing my condo:

• Clearly, US government is in crazy debt, with few options for getting out
• In the past, governments have used inflation to get out of debt, and this may be our country’s best bet over the next few years
• Inflation is great for people who OWE money, but not so great for people who’ve SAVED money
• Therefore, given my particular financial situation (and yours may be different) it is not crazy to pull equity out of my Portland condo, which has about $60,000 in equity based on the sale price in 2008

Think about it: you know how your parents brag about paying $12 for their house back in the 1970s, and today it’s worth $500,000? That’s inflation at work (and sometimes, also appreciation). In an inflationary environment, everyone’s mortgage payments become much more manageable as overall prices and wages rise.

I wanted to explore my options. What if I pulled some equity out, and at the same time refinanced into a lower interest rate?

Seemed reasonable at first, but it wasn’t long before my bubble burst.  After pulling some “comps” (sales from comparable properties nearby) my mortgage broker had some bad news: my condo was underwater. The balance on my mortgage was more than the condo appeared to be worth.

WHAT?!?!

Despite my high and mighty sense of compassion, I never thought that I would be counted among the ranks of oxygen-deprived homeowners. I thought I’d bought my place in the trough of the market. I knew the place hadn’t appreciated, but to depreciate by so much?! Unthinkable!

I shuddered.

I would never be able to refinance, and I certainly couldn’t pull equity out of the condo, since my $60,000 of hard-earned equity had vanished into thin air. People, I’m not lying when I tell you it was painful. Even though I’m in a relatively good position–I’m not planning to sell the place, and it pays for itself as a vacation rental–this was nauseating news.

But! Ericka, my determined mortgage broker, had a plan: let’s see if I qualify for a HARP Loan.

Negligent real estate blogger that I am, I wasn’t sure what a HARP loan was. But after some research, I’m now a big fan.

HARP (Home Affordable Refinance Program) is an Obama program aimed at homeowners who are current on their payments, but who’ve ended up underwater. The idea is that these responsible buyers shouldn’t be prevented from refinancing into a lower interest rate–and boy howdy, they sure are low these days!

So HARP lets you borrow up to 125% of the home’s value. There are tons of restrictions–for example, the home must be a primary residence (so I would’ve had to move into the condo for a while), the loan must be held with Frannie or Freddie, etc.

We ran through all the numbers, and ultimately I decided not to go through with the refinance. The payback term was a bit long at 3 years (that is, it would’ve taken 3 years for me to recoup the cost of refinancing), so the savings weren’t enormous given my already-low interest rate. My very responsible broker advised me to do the refi if I planned to hold the condo for at least 3 years, and not to do it if I thought I might sell within 3 years.

While I have no immediate plans to sell, I wanted to keep my options open. So while I appreciated HARP opening its arms to me, I ultimately declined.

But the moral of the story is this: If you’ve been a diligent homeowner making all your payments and feel snubbed that you aren’t getting a piece of the bailout action, HARP is here to help (at least until June 30, 2012, when the program expires).

[photo credit]