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My New Refinancing Idea: Brilliant or Stupid?

by J. Money on Monday, January 7, 2013

finger puppet idea

Remember last week when I said it might be a century ’til we could refinance our mortgages again? Well I may or may not have stumbled across something that verifies me as either a huge super genius, or a bumbling idiot. You’ll have to gauge for yourself after reading this ;)

It all started with me being pissed that every time I call up places to see if we can get refi’d now, we’re pretty much laughed off the phone. “Umm… you DO know you’re underwater, right? By like, a lot?” Noooo, I had no idea? Really?? I only see the numbers EVERY SINGLE DAY when I log into my accounts!! Ughh… Or perhaps even worse, “Sure, you can refinance! Just come up with $100,000 and we’ll hook you up.” *Shakes head*…

($100k is the amount we still need paid off in order to go from being underwater by $35k, to having 20% equity in the property due to stricter rules. Well, $91k paid off really, but an additional $8k-$9k in closing costs too that we’d need to bring to the table)

This happens without fail every time. Which is approximately twice a year, spread out in 6 month intervals – apparently the perfect amount of time for me to forget about how upset I get and magically think this time around will be different! Haha… Well, it never is… though at least now we’re down to $100,000 in cash needed instead of $115,000 – yipee!

Anyways, all this repeated itself last week after my regular check-in with the 2 main places: Chase, where my current 1st mortgage is, and who graciously allowed us to refinance 1 1/2 years ago which we’re still shocked about!, and then USAA – the place I’d prefer to have my mortgage at so I could complete my “all accounts under one roof” mission :) This time around I decided to stop for a second, though, and see if there’s something I’m missing here.

WAS there a way to get around all this $100k nonsense?? Could I swap money around and somehow *trick* the companies?? Or trick myself, even?

I got to thinking long and hard about it (that’s what she said!), and this is the magic that popped out:

What if I could get someone to loan me a huge pile of cash, just so we can pay down the mortgage enough to be refinanced, and then I could simply repay them back? With the money I’d normally had sent to the mortgage company anyways, and at the same 5.5% interest rate too? You know, ‘cuz plenty of people have tens of thousands of dollars laying around to do that ;)

I started running the numbers, and the longer I did the more it made sense:

  • If we refinanced today, we could probably drop our rate down from 5.5% to 3.5%. For the same 30 year fixed as we have now, since a 15 year wouldn’t save us any each month in terms of cash flow, which will be needed for this plan to work. Plus, we’ll have the house paid off in 8 anyways.
  • The interest drop itself would save us around $300/mo.
  • But our overall payments would ALSO drop from around $2,000 to $1,200! Cuz now we’d have a lower principal balance left over from all this money moving…
  • Leaving us with a net “savings” of $800/mo. Though of course now we have that little matter of paying off the huge ass loan we just took out which this would be applied to.
  • We’d also have ONE simple mortgage on the books now. No more 2nd maxed out home equity line, which was opened on day #1 to get us into our home – back when the industry was cray cray.

So by taking out a personal loan instead of waiting X number of years to pay down $100k of our mortgage as we’re currently doing (even WITH our extra $2,000/mo payments!), we’d basically be saving a $hit ton of cash every month, AND have a locked-in really low interest rate. Which is only bound to go up over the years, especially whenever we paid it off enough for us to even consider this route again (at which point it wouldn’t be worth refi’ing anyways).

I think I’m explaining all this okay? In other words, we’d swap out a chunk of money we’re paying to our mortgage company every month, and pay it to a generous lender friend instead. Thereby dropping our mortgage low enough to be a contender for refinancing. Which again requires #1: that we no longer being underwater, and #2: that we have 20% equity in the place.

Here are the action items that would need to occur for this to be pulled off:

  1. We need to pay off our 2nd mortgage (the heloc) of $34,000
  2. We need to pay off an additional $65,000 (which includes refi costs) to get to 80/20 loan-to-value
  3. We then need to get approved for this refi and make sure nothing explodes in our faces!

Pretty easy in a nutshell, really, but throwing it into the real world is a whole other story :) And I don’t think we’d be comfortable borrowing $100k from someone even IF they offered it up, especially as we have a solid $77,000 in cash savings just sitting there.

So the plan I’ll be introducing to the wifey here shortly is as follows: (I’m secretly hoping she sees this first so it won’t come at her all at once, haha…)

  1. We take $34k from our cash savings and pay down the 2nd mortgage ourselves- thereby not needing to borrow more. The kicker here is that it would totally screw up the promise of keeping $66k into it which is the only thing my wife has ever asked :( But I’d be sure to siphon off some of the new savings to help refill it back up too! Just not as much, or fast, as she’d probably want.
  2. I hit up a few people to lock in a personal loan for the remaining $65,000, and I offer to pay them the same 5.5% interest we’re paying currently. Hopefully making it more of an investment for them, rather than just a loan helping out a friend – which I wouldn’t want anyone to be pressured by. It would have to be a total win all around for it to work, meaning this 5.5% would have to beat out anything else they’re currently invested in. Maybe making it a road block instantly, depending on how conservative they are or not (for ex., money in the bank making piddly squat vs. money loaned to me at 5+% would be a MUCH greater return). I’d then make it a priority to pay off as much as I can every month using that $800 we’re now saving, plus all additional money already set aside for extra  principal payments via our $2k mortgage payoff plan.
  3. If no one wants, or can, lend it to us, I then check rates at credit unions and similar places for personal loans and see if that would do the trick. And/or maybe pull some from my investments and break my “no touch” rule of retirement accounts? If I can finagle a penalty/interest-free loan to myself? Hmmm… I’m 99% sure it would still be a big no-no in the end, but I’d be lying if I said I wasn’t rolling the idea around in my head ;) Gotta explore ALL options, right?
  4. I call up my accountant to make sure none of this messes too much with taxes or anything.
  5. And then USAA to figure out the *best* way to pull this off so I don’t shoot myself in the foot. Like whether or not to pay it all down first and then refinance, or just wrangle all the money up and wait for settlement to release it all… I’m sure there are right and wrong ways of doing it here.

And that’s it! The gist of my brilliant refi hack :) At least what I have so far after some initial brainstorming… I’m 99% sure this plan would work, but I’m also trying to be cautiously optimistic here. What am I forgetting? Is there a red flag anywhere I’m too naive to see? Is this too good to be true, or am I doomed from the start as I’ll never find a lender anyways??

I’d love to hear your thoughts on it now. And please don’t hold back :) Tell me straight up if you think I’m gaming the system like a champ, or if I’m being a total moron. I need some fresh eyes on this as I’m knee-deep in thought right now… And to be quite honest, a little bit too excited than I should be ;) This is a lot of money we’re playing with here, so def. keep it real!

———–
PS: Before you mention it, our home (or situation?) doesn’t currently work with HARP – I asked :( They say there’s “a chance” it would change later this year, but I’m not putting my hopes in it…

[UPDATE: Here's what we ended up deciding.]

[Photo by: Tsahi Levent-Levi]


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{ 49 comments… read them below or add one }

1 Lance @ Money Life and More January 7, 2013 at 7:19 am

The only problem I see with this is the mortgage companies are going to trace the money to see how you paid off such a large chunk of the mortgage and if they don’t like how you did it they’ll still deny you. Granted, your friend won’t have a lien on the house so maybe they won’t care. I’d reach out to someone in the mortgage industry, but not your bank, to see if this would actually work. I’d hate for you to do all of that then get denied because you didn’t pay the mortgage down with your money and took out a loan to get the balance to the right equity. You might also want to do an appraisal or anything else that would mess up your plan up front just to make sure it isn’t all for nothing.

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2 Mrs. Pop @ Planting Our Pennies January 7, 2013 at 7:33 am

This doesn’t sound outside the realm of possibility if you can find the right person who sees you as a safe investment. We borrowed $50K at 5% with a 5-year term from Mr. PoP’s parents to buy our duplex. They viewed the fact that we were buying an cash-flowing asset to be a low default risk. But we were also offered a $100K personal line of credit from Wells Fargo this summer, but the rates were crazy (and not in a good way!). It would have been at ~10%! That’s $10K in interest every year!

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3 Mom January 7, 2013 at 8:13 am

I agree with Lance – the banks are going to find that money. Now, if you could get your friend to agree (in writing) that the loan was a “gift” instead of a loan, you might have a better chance. Of course you’d still pay your friend back.

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4 alana January 7, 2013 at 8:42 am

get rid of that 2nd loan no matter what you choose to do. I know you have a whole post rationalizing your cash hoarding, but for two people and a baby, you can get away with way less in cash savings. Lets face it, you aint going nowhere, and even if you do decide to leave us all to bum around in Timbuktu for 6 months, this blog will still continue to make decent money, for a while anyway, without new posts. Why are two young healthy people with lots of potential hoarding so much cash when you could be saving thousands in interest by just paying off that second mortgage?…..by the way, that was just a metaphor, dont leave us and go to timbuktu

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5 Brian January 7, 2013 at 8:48 am

The problem with this is finding a friend who has that kind of money and is willing to give you an unsecured loan. While you are most likely good for the money, the friend is taking all of the risk here. There is pretty much no one I know who I would loan that kind of money to (except maybe my parents and there is ZERO chance they would ever need to borrow money from me). I also have a policy that I don’t loan money to friends because I don’t want to sour a friendship if something were to happen

The rate you get on a personal loan will probably be above the 5.5% since those aren’t really secured debts either, so they have to build in more risk to their rates.

I’ll be interested to see where this story goes and I hope it all works out for you!

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6 Terah@The Credit Report Chick January 7, 2013 at 8:55 am

I totally agree with Alana. No matter what you decide, I would still pay off the 2nd mortgage. In fact, when I read your net worth updates, I’ve always wondered why you haven’t already. I understand your wife’s reluctance to drop beneath 66k, but with the money you’ll be saving you can build it back up your savings in no time.

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7 J. Delancy January 7, 2013 at 9:20 am

Dear J. Money:

AN IDIOTIC Genius is what I’d call you. This is a whole heap of thought and writing on how to get out of debt by juggling even more debt albeit at a lower rate. I agree with Lance in the first instance, if the money is traced then you will be back to square one. Secondly, alana makes a valid point, get rid of the second mortgage at all cost (pun intended) and start saving on the interest.
Seriously, the mental wear and tear you are putting on yourself with this scheme is not worth it in the long run, and in your heart of hearts you know this, when you write “We then need to get approved for this refi and make sure nothing explodes in our faces!” What if it does?

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8 Diane January 7, 2013 at 9:25 am

A very bad idea for two reasons:

1. Even if you can find someone to lend you the $$$ – One or all of those loans will end up affecting your relationship with those people – even if you pay them back. The air will be tinged with resentment. You will be trading a refinance for the souring of personal relationships. I certainly wouldn’t lend anyone that kind of money. Certainly not for 5.5%.

2. I think any mortgage company would look at the paper trail for the old mortgage payoff, find the $ and not approve you.

Sure, you are impatient. But just keep paying it down. As you accelerate your payments the difference in interest will matter less and less.

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9 Heather January 7, 2013 at 9:26 am

I think its just too many moving parts….. And you have some amazing friends/family that would loan you that kind of dough. I’ve often wondered about that second mortgage. Just get rid of it and keep on moving… I’d feel more comfortable with that than the whole money shuffle dance.

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10 Adam January 7, 2013 at 9:41 am

If your friend gives it as a gift then you must pay IRS gift tax. Do not pass go, do not collect 200 dollars.

Alternate suggestion:
Your wife wants the 66k as an emergency fund.
Your emergency fund is based upon monthly expenses.
Your HELOC is a monthly expense.

1 Show the wifey how she will want less money in the emergency fund (60k, 55k, etc.) when the HELOC is paid off.
3 Use the fund to pay off the 34k HELOC.
4 Use the savings to top the emergency fund off back to its new lower value (say 55k)
5 ??
6 PROFIT

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11 SavvyFinancialLatina January 7, 2013 at 9:53 am

Umm. This sounds really complicated…
Just wondering why did you choose to buy such an expensive house then?
Do you think the bank influenced you to increase the value of the homes you were looking at?

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12 Samantha January 7, 2013 at 10:02 am

Totally agree with Adam!!!

When we pay off our mortgage, our Emergency Fund will definitely be lowering, because our fixed monthly costs will be lowering. In fact, our plan is exactly this: to make the final large payment on our mortgage by throwing some of the Emergency Fund onto it, because once there is no mortgage, we will need much less in the fund.

I think your wife could definitely be more comfortable if you put it that way. And run the numbers for her, too: how much interest will you save by paying off the HELOC now vs. waiting it out?

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13 Dr. Sheba January 7, 2013 at 10:11 am

Brilliant idea and very well thought out. It seems like your only issue is finding the generous friend. I agree with Brian on the friends and money mixture. I like to stay positive, but “what if” something happens. Your relationship goes sour and you may end up losing a friend. Paying them back with interest is a plus also, but unfortunately you’re NOT FDIC insured. Your plan is outstanding, but obtaining that $100k and convincing the Mrs. to use the savings is the hardest part. I have faith, however, that everything will work out.

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14 Jay @ effumoney January 7, 2013 at 10:20 am

By borrowing the money from a friend you are taking on additional debt before you refinance, the lenders will see that and it will count against you as far as your total debt to income ratio. Secondly borrowing from friends and family is a slippery slope, even when you set up promissory notes and have notarized agreements, you run a serious risk of harming that relationship forever, generally that is a decision everyone regrets when it is too late.

You goal is to reduce your total debt, so you should not be looking to borrow elsewhere, more borrowing never leads to good debt reduction , a perfect example is the federal government, fiscal cliff, debt limits etc… All this nonsense in the political news is about how we need to borrow more to pay for the debt we already have because the government over spent, when in reality the government needs to learn how to live beneath its means as well as make good on what it has already spent. Politics aside you can juggle the money/debt you already have to save a lot of money in the interest you pay both near term and long term.

You currently owe ~$281k @ 5.5% and another ~$33k at 2.8% and have ~$77k in cash earning 1% or less, I know you like having a “Monster cash account” in case of emergencies, but you are losing 4.5% annually on that balance by paying higher interest on you mortgage. Current mortgage rates for 15 years are 2.5% to 2.75% and on 30 years are 3% to 3.5%, having a mortgage at 5.5% in this rate environment is an emergency, rates will not stay low forever so you need to lock in a refi, but you are looking ways to beat the system by borrowing from a friend or friends while you are sitting on a ton of cash that is not working for you.

By reducing you first mortgage by ~$77k over the next 12 months you would save over $4k in interest, you would owe ~$204k on the mortgage and the same ~$33k on the HELOC for a total of ~$237k. To get an 80% LTV on a $285k appraisal is $228k, you are paying $2,200 a month into your mortgage you are less than 5 months away from getting below $228k at that pace, you can do a straight refi on a $228k balance. At 3.25% your monthly payment will be $992 almost $1000 cheaper than current mortgage payment more than $1000 cheaper then you mortgage + HELOC payment.

You can then rebuild your monster cash account and never have to worry about trying to figure out how to refi again, you can spend more time working on new ways to generate income rather than trying to figure out how to save on your debt.

If you had a credit card with a balance over $77k you wouldn’t think twice about paying it off instead of keeping the cash on hand, 5.5% is not credit card interest levels but it is high in this rate environment and it will last for as long as you have a mortgage balance, saving 2% is worth tens of thousands of dollars in future interest. Oh and never you touch your retirement accounts especially when you have cash in taxable accounts.

Feel free to reach out if you want me to run some numbers for various scenarios on how much you can save long term.

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15 Jen January 7, 2013 at 10:23 am

This is what I always term as “creative financing” and in this situation, I think it’s a really great idea nor do I think it’s too “complicated” but is it do-able? I think it’s brilliant because you get that house paid down and can lock in on the killer interest rates right now and IMO it amounts to overall savings in the long run.

BUT some serious food for thought….

First, Lance (and everyone after him) is absolutely correct and it’s no joke. The banks DO look at that paper trail. My sister just last month bought her first home. She had “floated” my husband and I $1,000 to pay our condo dues until I got my bonus check, at which time I paid her back. It was literally a month. The bank saw that and questioned all of us “Where did that $1,000 come from? Did you borrow it?” They thought she borrowed a grand to get into her mortgage,….and that was just a grand! I had to get a notarized letter and send it to her banker stating that it was us repaying a previously loaned $1,000 to us! That was crazy…so if her bank was questioning a grand, someone’s definitely going to question you. May be a good question to ask USAA straight up front. They may have a different viewpoint but I’d get that understood from the beginning.

Secondly, I know you and the wifey are talking about moving. That could play a huge role in all this depending on the details of that, and it could go both ways. I think that’s a serious conversation you may want to have with the wife. When my husband and I relocated to NC from PA, there was a LOT of discussion and it was a very hard decision. Moving a family is a big deal, and your house situation definitely plays a factor in all that.

So just take those things into consideration. :) I wish you the best of luck!

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16 Grayson @ Debt Roundup January 7, 2013 at 10:28 am

I can’t say that I like the idea, but at least you are thinking outside the box. A $100k personal loan from a friend or group of friends could be hard to get depending on your relationships. Also, I agree with many about the bank finding the paper trail. Unless you can say that the money was a gift, but that is a pretty large gift. Good luck!

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17 J. Money January 7, 2013 at 10:52 am

THIS IS GREAT!! Thank you, everyone!! I love it how you’re just saying how it is too, haha… giving me a run for my money ;) Here are my thoughts back with everything…

@Lance @ Money Life and More – I do wonder about that a bit (which I will include in my questions to the bank, or a different one like you mentioned), but then I figured as long as all my finances look great as a whole it wouldn’t be that big of an issue. If they saw all the cash and investments/etc/etc yeah?

@Mrs. Pop @ Planting Our Pennies – Awesome job!! 10% is no joke.

@Mom – Can’t do the “gift” idea cuz of taxes :( I think you can only gift someone around $13k a year or something like that, at least if you don’t want to pay taxes… I like the way you think though ;)

@alana – Haha… Is Timbuktu even a real place?? But yes, while smart-wise it DOES make sense to pay down the 2nd mortgage, not all decisions can be based only on the facts or financials. You gotta add in comfort levels and your emotional state to make the best decision, at least in my opinion. And only half of this union between the wife and I are cool with it currently ;)

@Brian – Yeah, that’ll probably be the main roadblock that stops us. I figured the “being good for it” shouldn’t be much of a problem since anyone can see how much cash and money we have just by looking at this blog, haha, but the “making it weird between friends” part is certainly something to consider… this would only work between those friends I have that are businessmen/entrepreneurs where we all understand it’s purely a business decision. I have a few on my mind that I’ll be sending the feelers over to.

@Terah@The Credit Report Chick – So go against my wife’s wishes? ;) I’m a firm believer that money decisions have just as much to do with emotions when coming up with the “right” answer as does the facts, so we roll with that when finding solutions… And lose a little money in the long run too.

@J. Delancy – Honestly, I think the wear and tear of not being able to refinance in 3 years when we pay enough to be ABLE to would be more wear and tear than a 2nd mortage in the mix at 2% or taking on this crazy scheme of mine ;) This stuff excites the pants off me and gives me something fresh to do/think about, haha… Unless ofcourse it does all blow up in my face, but that’s what I have you all for! To tell me what I’m forgetting ;) And I’ll be researching more too, of course, but for now we throw the idea out and see what y’all think… so thanks for sharing!

@Diane – Two valid possibilities indeed. Always a risk with this stuff, yeah? Which I’d help lower by a) only presenting this to friends who I know have done similar stuff in the past and can separate business with pleasure better, and b) ask the bank straight up if it the loan would be an issue. Especially knowing our entire financial picture which should be decent enough. But at the end of the day you just never really know until it’s all over and done with! So we’ll see :) Thanks for being real with me.

@Heather – It def. isn’t for the faint of heart, that’s for sure :) But that’s also what kinda excites me about it all! Big risk, big reward! Haha… Well, I don’t personally think it’s too much of a risk or I wouldn’t be considering it, but you get what I’m saying…

@Adam – Haha… I like the way you think, but unfortunately I’ve already tried that ;) But it may be worth another chatting with, especially after she sees this post! HAH!

@SavvyFinancialLatina – Look at you keeping it real! Haha… No, the bank didn’t influence us on paying more for a bigger house (in fact, our approbal number was up in the $400s I believe), it was the HOUSE itself that influenced us :) And also our adventurous spirit that just said “F*ck it.” Something that gets us in trouble every now and then, haha… If it wasn’t for this blog and changing my whole entire life w/ entrepreneurship, I’d take back buying the house in a second. It was hands down the wrong move for us for sure – but we live and learn.

@Samantha – Yeah, all true in theory but harder in practice – at least with someone who loves a lot of money in cash :) Our 2nd mortgage costs around $90 in interest every month, which is also our monthly payment (we have an interest-only one which means we have to apply extra at our own discretion to pay down the principal). This is why it’s not as sexy to say “Hey, let’s take $35k out of cash savings to save $100 or $200 a month!” Hehe… But believe me, I wish it was. I’m totally down for knocking that puppy out and moving on. One day! :)

@Dr. Sheba – Hehe, thanks friend! We’ll only know the answer once/if it’s ever put in play, eh?

@Jay @ effumoney – Holy crap – look at all that number crunching, I love it! Thanks dude :) Only problem is you’re assuming we make decisions simply based on financial numbers and facts – not emotions (like I’ve been mentioning to others on this strand). There’s no way in hell we’d ever offload our entire emergency savings, or a bulk of it, to refinance or do anything else with it – it’s just not an option (partly for me, but fully for my wife). So we’d need to come up with a different solution than wiping away our E.F. – thus where I came up with this crazy idea. It’s true taking money from one place to pay another isn’t usually good, but going back to your credit card example I would TOTALLY recommend that to someone, wouldn’t you? Getting a lower/freer balance xfer offer to pay off a c/c with high interest and then continue working diligently to pay off the new one?? (As long as the person is responsible enough, of course). Cuz really it’s the same thing you’re doing anyways, only now with a lower interest %. That’s the theory behind this idea of mine too – Continue on with the same paying habits every month, only send the money to someone else instad of the bank and save hundreds of dollars every month in the process. We’ll see if we end up moving this forward, but either way I appreciat the time and thought you took to comment on this here. It’s really awesome man :)

@Jen – Thank you Jen!! I agree with you all the way – the wife and I will most DEF be talking about this soon (aka today!) which will also shed light one way or the other :) And the moving part also plays a larger role now too – something I haven’t considered yet all the way but should. Thanks for stopping by!

@Grayson @ Debt Roundup – Yeah, I would totally be straight up with the banks and tell them – I wouldn’t want to hide anything. I just wonder how much that part matters or not, knowing that our overall finances look legit. But I’ll have that questions answered once I flat out ask them :)

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18 Frugal Midwest January 7, 2013 at 11:10 am

I just completed another refi and they asked me to identify where $320 credits came from. I can assure you they’ll ask where a $50k+ loan came from. You’ll also be asked to identify any outstanding debts you have, and you would be either forced to divulge this (increasing your debt to income ratio), or lie and get away with it for now. I think if they found you to lie, they could request payment on the full balance immediately, leaving you in trouble.

I love the creative thought here, but I think you’re going to have to do it the hard way.

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19 Kacie January 7, 2013 at 11:23 am

I do like Adam’s idea. How much per month is your HELOC minimum? You can reduce your efund by that much and then some.

I don’t like the idea of borrowing huge gobs of money from someone. Maybe you could try those peer-to-peer lending sites to see what kind of rate you could come up with?

Because, sad to say, how can we know your house will appraise for what it’s at today? What if it has gone down :( ?

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20 Financial Black Sheep January 7, 2013 at 11:36 am

J, I agree with you on a previous comment about comfort levels. If you hate having all of that extra mortgage and can do this whole plan I say do it. If you feel the house is holding you back try anything to get the interest rate down. Sometimes the craziest ideas work. Either that and they are just crazy ideas, then who cares creativity rocks ha!

I kept trying to figure out how to take double classes in order to graduate early, but it never happened because we would have to take on more debt and hope nothing bad happened. Yeah right, pipe just backed up and washer broke, I call that bad. It was worth trying though…

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21 Edward Antrobus January 7, 2013 at 12:08 pm

If I had a spare $100k, I’d totally loan it to you. Actually, that is an idea. Instead of trying to hit up friends, maybe there is a way of setting up some P2P lending where readers could chip in for a loan. It would only take $15/ RSS subscriber! I know Virgin Money used to do something like that, but I think they closed that down.

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22 Lance at Money Life and More January 7, 2013 at 12:33 pm

It would be wrong to not mention a short sale… just saying.

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23 Stephen January 7, 2013 at 12:48 pm

I agree with Jay @ effumoney. Both you and the wife are working now, seems that you have a pretty stable job, look at all of us on here. If you could stomach the short term risk factor of dumping all of your savings I would go after it, however, I might do it differently from Jay. I would pay off the HELOC first, then use the rest of your money to pay toward your primary mortgage.
You won’t knock as much off interest savings on primary mortgage but it would leave you with the HELOC as an emergency savings account if you had to get your hands on a significant sum of money. If you just dump all your money towards your primary mortgage, then you can no longer have access to any of that money.
Once you have paid down primary mortgage and able to get refinanced, I would open another HELOC with your new found equity (I don’t know all the rules on HELOCs associated with refinancing). Either way, have the HELOC for the above reason, in case you need a ton of money in a short amount of time. It would be like one of those Australian home loans, until you could rebuild your monster cash savings again (with an added $800 a month now).
Also consider a no closing cost refinance, if you guys might move in less than 4-5 years, it might not be worth getting the lowest possible interest rate vs the money you would spend on closing costs. Or rather what you might lose over the last 2 years of that mortgage might help to off set your short term risk.

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24 Brent Pittman January 7, 2013 at 1:57 pm

Why not do your #1 and #2 and then reassess to see what the market is then? How long would that take to complete? I’m guessing the warm spring will bring more value to your home, but who knows right? No pressure to pull the trigger on borrowing the cash until rates start ticking up.

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25 SMB January 7, 2013 at 2:01 pm

I don’t think the bank would go for you borrowing the money. I bought a house back in July with a $13k gift from my dad and it was crazy the number of hoops we had to jump through to prove that the money came from his accounts and went into mine (think lots of screen shots of our bank accounts). I’m not sure if things are different for personal loans, but I’d assume that would actually be worse. I had the money in my account and they still wanted all this proof of where it came from!

But even if it did, it all sounds too complicated – what happened to your goal of keeping it simple this year?

I whole-heartedly agree with Adam’s approach. Also, I’m from the DC area (on the Virginia side) and housing prices are rising here, so hopefully by summer time you’ll be less underwater even without making any major pay-offs.

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26 Jacob @ iheartbudgets January 7, 2013 at 2:28 pm

I don’t know the history, but if you have an FHA, you can do the FHA streamline, even if you’re underwater. I did a whole write-up on it, as we just refi’d to 3.25% without any fees and we’re underwater by quite a bit! Shoot me a DM if you want the link to the post. :)

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27 Brooklyn Money January 7, 2013 at 2:39 pm

Why would you pay off the smaller 2nd mortgage or HELOC, whatever it is? Isn’t it a really low interest rate?

Agreed w/ what Lance and everyone else said. The banks aren’t going to like this plan and I can’t imagine you getting a mortgage like this.

You can get private investors to buy your mortgage or loan you the $. My mom invests in mortgages from a local builder through her financial planner. If you know a planner, they can ask their clients if they are interested. You might have to pay the planner a fee for this service.

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28 HighOrderGuiltComplex January 7, 2013 at 2:40 pm

J, aren’t you planning on moving in the next year or two? Why on earth would you dump 8-9k in refi costs alone when you are possibly going to sell your house in the next few years.

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29 Kelsey January 7, 2013 at 3:11 pm

Based on what I went through when we bought our condo, the bank is going to want to know where that money came from. We received a $50k loan from the future-in laws, and the bank only allowed the gift if it was to their son (my fiancé) and not to me. We ran into some income complications with my fiancé as he’s 100% commission based, so they left him on the loan only to fulfill the gift requirement. They asked for multiple written documents (letters and forms) verifying that this money was a “gift.” Otherwise, I donut see any other hang ups, but I’m also not an exert on mortgages. That one thing just stuck out from my own experience. =]

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30 Kelsey January 7, 2013 at 3:11 pm

Oh damn it, don’t! Not donut! Stupid iPad autocorrect!

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31 John S @ Frugal Rules January 7, 2013 at 3:35 pm

I love the outside the box thinking and really do hope it works for you. That said, my thoughts really won’t be that different from those already mentioned. Getting a loan like that from a friend can possibly do some funny things to a relationship and I am sure the bank will be able to trace it. I think there are a lot of moving parts to it, but that does not necessarily mean it can’t/won’t work. We’re in a similar situation to you (without the heloc) and really would love to be able to shave 2% off our mortgage but have been getting the door shut each time. Who knows, maybe the hope in HARP will come through for both of us. Though, I am personally not going to expect it to.

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32 Jay @ effumoney January 7, 2013 at 7:29 pm

@J$ – I’m a numbers guy :) Actually I am not assuming you make all of your decisions based on the financial numbers and facts, anyone who reads your blog would know you have a lot of emotion invested in your finances. I was pointing out what the numbers dictate, and showing you the optimal use of the three accounts, cash, mortgage and HELOC. I made the mistake a long time ago of being emotional about finance, that is a huge underlying problem with most people they make knee-jerk decisions about financial matters and let emotions get in the way. Finance is strictly numbers; I do everything by the numbers and have for a long time now. When you pick your kids names that is emotional, where to go on vacation, where to live those are not problems that can be solved with a calculator, numeric problems only have one solution, you might have multiple math problems to solve with different answers and you need to pick which one has the right criteria for you, but every math problem has just one answer. I have a business degree and write financial software for Wall Street for a living and have been at for over a decade, the reason everyone hates Wall Street is they take emotion off the table and just work the numbers; they win more often than not, which is why everyone hates the big banks :) Oh yeah and they get bailed out too :)

Now of course many of us have wives (or husbands) who we need to be convinced at times, and we all know some battles are best not fought. In reality I’m pointing out a more mathematically correct way to deal with your mortgage. In continuing along those lines here is some more math, at the end I will make a suggestion that would both be financially prudent and also probably something you could convince the misses to do.

You are looking for ways to refinance as rates are at historic lows and the criteria is you need to have a loan value of $228k on your $285k property. Your goal is to get your current mortgage balance down from $314k; the reason for this is $281k of that balance is at 5.5%. You have devised a very creative way to refinance you mortgage and reduce your interest to 3.5%, but you will still owe $65k at 5.5% and this interest is no longer tax deductible as it is not considered a mortgage but a personal loan, if it is secured against your house you are back where you started by being upside down on the home and can’t refinance. The only way to reduce the mortgage is to pay it down and not with creative maneuvers. Your effective interest rate between the 2 loans would be 3.94% on a total balance of $281k compared to your current effective rate of 5.12% on $314k; you will be paying $35k of you cash to save you 1.18% of interest per year and resetting your loan for 30 years. Currently your mortgage costs you about $16k a year in interest; your new scenario would cost you about $11k in interest annually. My suggestion cost you $77k and you would have a rate 3.5% on a $228k loan cutting 1.62% off your loan interest, with an annual interest charge of about $8k. Both you current situation and what I suggest are fully tax deductible; your suggestion only has the mortgage as tax deductible. Emotion costs you about $8k a year in interest on a house you are upside down on.

As far as balance transfers, there is a subtle but distinct difference, you apply for a new credit card and you owe nothing on it, you use the new 0% card to pay off your old high interest balance, you never owe both credit cards the money at the same time (it might appear that way as transactions process online, but both accounts will register the change the same day when the banks process them.). You are talking about borrowing money from a friend(s) and then doing a refi, between the loan from your friend(s) and the refi you owe both your original mortgage lender and your friend(s). The balance transfer is the same as a refi where one mortgage lender pays off the other mortgage lender, you never have 2 mortgages.

The first thing I would do is make sure you are not eligible for a HARP 2.0 refi which allows you to refi regardless of your LTV, the criteria is your loan must be owned by Fannie or Freddie, you must be current on your loan and have a minimum credit score (I believe 660, but could be wrong). You can google Fannie and Freddie they have tools on their sites that will tell you if they own your loan, you should also check MERS, they manage most other loans. If you need the links let me know.

If not, then my real suggestion to you is take the $34k you planned on putting into the HELOC pay down your mortgage instead, and start applying your $2,200 a month to your mortgage instead of the HELOC. When you get your CLTV down to 80% then refi both loans into a new mortgage. Every dollar you put into the HELOC instead of the mortgage costs to 2.7%, forget the psychological reasons for paying off the HELOC first, Dave Ramsey is wrong, his advice is not financial prudent and the only way to tackle debt is to understand it, if you don’t optimize the payments you take longer to pay off all your obligations and it costs you more, neither is good for growing ones net worth. Also when using the snow ball method by tackling easy goals first, you never learn the underlying cause of getting into debt and it is likely to happen again. As you are upside down on the property right now all of your payments just go towards reducing your negative equity, now that does increase your net worth, but since you are not likely to ever be able to recoup the cost of the house in the current real estate environment it is in your interests to spend as little as possible to reduce your negative equity, which in turn builds your net worth with more bang for your buck.

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33 Fleamarket monger January 7, 2013 at 7:40 pm

JJ,

If you pay off $100K or have $100K in the bank. How much does your balance sheet change? Whose to say your house price doesn’t drop again. Pay your hose down and save a little and it will all work out bucko!!

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34 K.K. @ Living Debt Free Rocks! January 7, 2013 at 7:43 pm

Ok you’ve gotten some pretty good responses to this. I personally would not contemplate what you’re doing because I would be uncomfortable transaction that much money in the form of a loan with someone I know. It’s doable providing you do find someone who you could borrow from and that it would go smoothly. My curiousity actually lies in what your wife will tell you in response to your idea. Can’t wait for that post :)

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35 From Shoes to Savings January 7, 2013 at 9:53 pm

Great post! You’re idea is not crazy at all. I was in a very similar situation – home prices were falling so fast from when I first took out my mortgage that I would not have had enough equity in my home to refinance. I did almost exactly what you talked about: I took out a loan from my parents (about $15,000) to cover the difference, and I am paying my parents back at the same interest rate as my new loan (3.375%), just over a shorter period of time. I’m so thankful that they were willing to do this little “investment” with me, because I’m saving quite a bit of money in interest going from a 5% rate to a 3.375% rate, and this way my parents are earning more interest on that money than they would if it were sitting in the bank! I wish you luck in finding some people who would be willing to loan you out the money! Too bad online peer-to-peer lending line seems to be for existing loans…perhaps there is a way to start a new one using the online peer-to-peer lending sites?

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36 D January 8, 2013 at 2:36 am

a few things….I have thought for a while you need to take that cash and refi!! You can take 8-9 grand off the top. There are plenty of no/low cost refi’s. I have done two over the internet at http://www.firstIB.com. I look almost daily at their website, waiting for the proper lender credits to bring the true cost under $500. Today I saw a 7 year adjustable at 2.75% for $7. Yes 7 DOLLARS!! :) Since you plan to pay off in about 7 years, this could work and the payment stays flexible and low incase of emergency. I have been contemplating your same plan and thinking of dumping my large sum of cash to drop my net cash flow and pay off the loan faster.

I would consider my Roth IRA as my e-fund since it can be accessed penalty free, and I also have some Ibonds that can be cashed out. You have plenty of assets incase of a true emergeny that you can get to if you need. Think of that when you do your “mental accounting”.

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37 Tim January 8, 2013 at 11:16 am

It sounds like you have enough numerical and anecdotal advice already (what a GREAT comment thread! Seriously – awesome, thoughtful stuff here.)

I say ignore the people who say you shouldn’t do it just because it’s too complicated. To quote the medium-at-best movie, Road Trip – “It’s supposed to be a challenge, that’s why they call it a shortcut. If it was easy it would just be the way.”

I’ve been in real estate and business for years and some of the best deals I’ve ever seen come together as a result of creative financing. As long as the “complexities” don’t hide additional costs, which would flip your cost-benefit analysis, the fact that something is complicated shouldn’t be a deal-breaker in and of itself. Be bold and think creatively (like you always have)!

Awesome thought, even if it doesn’t work out. Way to push it!
(THAT’s what she said)

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38 J. Money January 8, 2013 at 1:27 pm

THANK YOU THANK YOU THANK YOU guys again!! Really good stuff here – I’m amazed at all the ideas so far, and is exactly why I wanted to post this out there. I’ve got a lot of emails too w/ some ideas, so look out for a new post in the future with some updates :) THANK YOU!!

@Frugal Midwest – I don’t mind at all telling them where all my debts are (actually, the loan would be the only one outside of the mortgage) and I’d never try and hide it. I just think maybe it doesn’t matter as much since my money overall is good?

@Kacie – Heloc minimum is like $90. I thought of peer-to-peer too but interest would be too high :( And you’re right – the house could be appraised for lower too! Which means I’d have to borrow a little more… but on the flip side, if it’s gone UP by the time this gets moved forward, then I would awesomely need less!

@Financial Black Sheep – We both work the same way :) Sometimes we need something to force a decision for us too! That’s how I ended up blogging full-time right away – got laid off and that was that!

@Edward Antrobus – Haha… well thanks man, mighty kind of you :) I do like the P2P idea but interest would be more than 5.5% I’m almost certain of.

@Lance at Money Life and More – No way I’d ever do a short sale ;) I got myself into this mess, and I’ll get myself out without defaulting on my promise.

@Stephen – I DO like the idea of using our HELOC as an emergency fund actually, I think the wife would be down with that, but only problem is we’re so underwater that once it’s paid off it’s gone 100% – we can’t dip into it or anything until we have more principal paid off… and maybe more than 20% these days? Not sure how that would work… but once we’re refi’d I like that idea a lot! Good one :)

@Brent Pittman – True true… we have time until the rates start going up again. And by then you’re right – maybe we’ll get lucky and the house will have gone up? And we’d also have paid off more by then, meaning we need less to borrow too. Either way though, yes – I’ve already started on #2 (passing the idea by people), but my wife isn’t sold on #1 yet (paying off 1st mortgage) unless we’re def. moving forward with the refi. If we don’t, I don’t think I can convince her – although I’m trying :)

@SMB – Haha… touche. But the idea here really IS simple in a nutshell ;) I just pay a friend some money instead of my bank! And I wipe away a debt and thus only have one simple mortgage left – outside the new loan. It just sounds super complicated because it would take a lot of work to get approved/etc/etc. But the result would be a nice simple (and cheaper!) plan – which I like. So kinda messy, but overall simple – at least to me.

@Jacob @ iheartbudgets – We don’t have an FHA :( That would solve everything though!

@Brooklyn Money – Huh… I didn’t know people did that through their planners actually, very interesting. I assume the rate would be pretty high though, eh? To answer your question about paying off mortgage #1 – we’d need to to get to 80% Loan to Value.

@HighOrderGuiltComplex – ‘Cuz in reality we’d probably have to hold onto the house for many many years until it’s up high enough for it to be worth selling anyways :( Which more than likely means more than 3 years (which we’d have the refi costs paid off by then) and we’d just be renting it out as an investment property… And if we liked how it was going? Then we’d continue forward and start MAKING lots of extra money! Woo! (Great point you bring up though, so thanks for doing so)

@Kelsey – Haha… I liked it that you said donut!! I was laughing at that!! :) Haha… but yes, very true – we’d need to figure out the best way to get this money applied, no doubt about it.

@John S @ Frugal Rules – I would welcome that miracle any day! We’d both be set with that :)

@Jay @ effumoney – Well, I must admit you raise some good points my friend. And as much as I hate it, I know you’re right about paying off the 1st mortgage over the 2nd, and then combining them in a future refi when it’s time. I do like that a lot. But I do disagree about the snowball strategy. Whenever I think about paying down the 1st (much larger) mortgage, I want to vomit. It doesn’t motivate me one single ounce, and my brain automatically wants to do something else with it. Like payy off the smaller one first since it excites me. So if the risk of going w/ the 1st one is quitting in the end whether I get bored or burn out or whatever, then ofcourse it’s not a smart move. Whereas I’ve been 90% happy with paying off the 2nd one and DOING SOMETHING about it even though I know it costs me in the end. And the only reason I’m not at 100% happiness level is because it still kills me to throw out $2,000 every month for money I’ll more than likely never see back. So I’m already forcing myself to continue paying it off and it’s the “more fun” one! That % will go way down when I start paying off the 1st one, I know it for a fact. Which is why I’d end up stopping or using the money for something else down the road.

But, you are 100% right – my route fails me financially and I should do yours instead (at least if I don’t do this refi plan I’ve concocted ;)). But you know what? I’ll do myself a favor and think about it for a week and see if I can somehow trick my brain into allowing it. I’ll never completely rule anything out forever, but I just know myself well enough that I work better when I’m more excited about stuff. And right now that 1st is anything but.

Good good thoughs again, bud!

@Fleamarket monger – The balance sheet stays the same on month #1, but then every month going forward it has an additional $300 extra in cash flow :) Which is the main point of all this – continue doing pretty much the same thing, but save $300 every month in the process.

@K.K. @ Living Debt Free Rocks! – Haha… that one will come in due time, don’t worry :) I just hope it’s favorable!

@From Shoes to Savings – AWESOME!!! Best news I’ve heard all day, haha… proof that it IS do-able! Just on a much bigger scale :) Thank you so much for spending the time to let us know about that – I am pumped.

@D – Oooooh I’ve never heard of that bank before – I’ll go and check it out after posting this up, thanks! And let me know if you end up doing something similar too :) I agree we’re financially stable w/out the major cash savings, but again I’m not the only one with the say on it, so we’ll see… good good stuff.

@Tim – Haha… LOVE that movie!!! Great quoting :) And yup – all this advice/thoughts/etc is def. helping me consider things, but at the end of the day I’ll stick w/ what feels right in my gut however that looks. And right now it’s still looking like this idea as some legs. But time will tell!

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39 scott January 8, 2013 at 6:09 pm

I was in almost exactly the same situation. I had a second mortgage as well and our house was underwater. I hatched a plan with my parents who were going to put a big chunk of money in a CD at my local bank. They were happy with the rate. I would be on the account as well. Then, I would take a loan out against the value of the CD, which would be 1% greater than the interest rate on the CD (still really low…about 2%). The repayment terms, I was told, were totally at my discretion. The banker said that I could pay it off in any way I saw fit. After all, they were just lending (my) money back to me. The plan was to then take this loan, pay off the 2nd and some of the first mortgage and then refinance. My DTI would have been close with this new loan but I thought it would work.

The plan never materialized because my parents wanted me to sign so many documents regarding what would happen should they die (I have siblings) that I just thought it wasn’t worth it. (There was never any intention to not tell the new lender about the source of these funds, by the way. The one I was working with said the plan was fine. It would just raise my DTI ratio). In the end, I hurled all of my emergency fund to the problem and refinanced with a local bank who kept the loan in house. I did not get the best rate (It is 4%) but it was a lot better than what I was paying (6.5%). They also only allowed 15 year fixed rates, so that is what I did. However, after paying off the 2nd and paying down the first our payment went down about 50 bucks and we will be paying it off 9 years earlier. Also, more than half our payment is to principle. Our EF is about halfway back after 6 months.

I suggest you look into the CD loan option if you feel you must finance your way out of the problem. That being said, I am very happy we just sucked it up and depleted our EF to get it handled. As a side note, this bank did the refinance with only 10.5% equity rather than 20%. Local banks holding the note themselves are more flexible.

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40 JoeTaxpayer January 9, 2013 at 11:52 am

The system is broken.
When people such as Donald Trump arrange their investments, they do it in a way that they have power over the lenders, file for bankruptcy on one property but not the other, as each is a separate legal entity. He didn’t create his own wealth, ever dollar can be traced to an investor he screwed.

As for you (I’m speaking hyperbolically, you can’t do this) – go to the HELOC lender. Tell them you plan to walk away from the house. Since it’s worth less that even the first mortgage, the HELOC lender will have zero. Now, you have a few choices. (a) tell them you are a nice guy and will hon0r the debt, but as a personal loan. (b) offer to pay it now at say, 50 cents on the dollar. (c) something clever I’ve not considered.

Next, you go to the main mortgage holder. Tell them you are ready to walk away. Bring data showing how it will take them 6 months (or more) to get you out of the house, and once you’re out, the property will deteriorate quickly. Property tax will still be due and they will have a nonperforming loan. Show recent sales in your area, and what they’d get from the new buyer. Now, you’re willing to spare them all of this if they’ll do 2 things. Refinance you at no charge to the 80% LTV with the 3.5%/30 year rate, and finance the rest as a fixed 10 year loan you agree to pay off. This is far better than the alternative of you walking away.

If you add two zeros to the values discussed here, this is exactly what Trump did his whole career. The difference? He was far less kind to the banks. Oh, and you have better hair.

J, you are in the crazy grey area, someone ready, willing and able to pay your mortgage, but underwater and stuck in a jamb. The banks should negotiate with you, not push you away.

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41 Yo Buddy! January 9, 2013 at 5:03 pm

Can’t you do this backwards? Refinance with all of your available cash. Then after you’ve closed, get a HELOC to replenish your cash account?

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42 J. Money January 10, 2013 at 12:35 pm

@scott – Very interesting!!! And damn that’s clever, haha… you guys are good here with all the work arounds, I love it :) And even better that you were able to refi with only 10.5% equity! That would change a LOT of things on this end if that were the case, so I’ll most def. be doing more research here – believe me. Really appreciate you spending the time to share this CD idea with us – means a lot.

@JoeTaxpayer – I knew I liked you for a reason ;) Really REALLY great perspective indeed. And makes me mad that I’m so NICE all the time! Haha… I know I could be a dick and threaten to walk/etc (and then ACT on it too!) but my poor little heart just wouldn’t be able to do it… making me a suckier business man too – this wouldn’t be the first time I screw myself for not being more shrewd :(

@Yo Buddy! – You’re actually the second person to mention this route lately, and I think there *may* be something too it – I just have to research more. I know I couldn’t get at least $35k of it back cuz that’s only to wipe out the undewater part, but the 20% down? That might be something!

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43 melissa January 11, 2013 at 9:01 pm

Last I talked to usaa they were doing refinances for 95% of the appraised value so you may not Need to come up with the full amount for the refi… this was only 2 months ago so it may be worth a phone call

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44 Evan January 12, 2013 at 12:34 pm

THere were too many comments to go through everything but what about debt to income ratio stuff? Also you are now self employed (vs the wonderous w2 in the past). You may jump through all these hoops only to be denied b/c your self employment history is not long enough or your debt to income ratio on the new note is too high (especially if you have a 10 or 5 year amortized note…although you could do a demand note at 1% and then change it up as soon as you close to a 5.5%)

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45 J. Money January 14, 2013 at 10:15 am

@melissa – That’s what I hear too, but for whatever reason they never say that’s an option for me? Maybe my type of house doesn’t fall under that or something? I’m going to try and get a more detailed answer the next time I call – which will probably be this week :)

@Evan – That is a minor worry of mine, but from what I hear they use 2 years back of records which I’m now officially over :) Been on my own for 2 years and 1 month – woo!! And also, I’ve made more on my own than w/ W2 “real work” so debt-to-income should be even better… but really who knows once the process gets going – all great questions to ask though and get a confirmation on, thx ma.

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46 Travis January 21, 2013 at 11:39 am

My dad is in a similar situation as you except it is with an investment property. Have you looked at the makinghomeaffordable.gov website? I think there are some options for you there. My dad is being held back because has a loan with a small servicer (Bay View Loans) and it isn’t his primary residence. If I were you, I would take a long hard look at that website before making any ninja moves with your money. They even have programs to help take out the HELOC.

One other thought I had was potentially doing a balance transfer using high limit credit cards and send the money to a bank to pay off the HELOC. I am not sure what your Credit Score is, but I would think between you and the misses you could potentially pay off the heloc today. Most BT offers are for 18 months and you could apply your extra $2,000 to the credit card payments instead of the HELOC or first mortgage.

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47 J. Money January 29, 2013 at 1:01 pm

Yeah! That’s an idea we’re actually mulling over too – if we can find a card w/ no fees for balance xfers/etc. 0% interest for 18 months would be the perfect amount of time to nip it all in the bud and pay it off in full after the term’s over. I don’t know if I’d have the balls to pull the trigger on it in the end, but I’m definitely considering it ;)

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48 Carla January 29, 2013 at 12:12 pm

This is a really bad idea…. If you want to get out from underwater this badly, you need to get professional help. What are you going to do if one of you gets sick/hurt, you’re down to one income, medical bills pile up, and you have a pile of personal loans, plus a mortgage? No savings, tons of debt. Shuffling isn’t fixing. If you’re not planning on moving, sit still and stomach the interest rate. Being underwater doesn’t matter if you don’t plan on selling. And banks do see debt shuffling, and they don’t smile on it. Besides, you’ll need legal notes for each of these personal loans, and the cost for that isn’t small. If I were you, I’d relax, plan on staying put for a while, double down on payments and wait. Home prices are up. Order an appraisal every year or so to see where you are. Being underwater won’t put you into bankruptcy, but being cash poor and debt rich will.

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49 J. Money January 29, 2013 at 12:59 pm

We already live pretty much on one income and I have tons of savings in the bank plus investments so that part isn’t a problem. (And not debt outside of these mortgages too).

If I owe the bank $100k or a friend $100k how is that much different? Besides all the paperwork/gaming the system/etc… that part ofcourse gets wonky, but financially wise I think we’re still fine. We don’t *need* to refinance or get out of mortgage debt faster, I just prefer it and am always looking for a work around ;)

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