If Refinancing Is Too Difficult Now, Hang In a Bit Longer

When Roland Leger bought his house three years ago, he managed to avoid getting caught up in an adjustable-rate mortgage that is set to increase within the next year or two -- the kind of loan that is trapping many people these days with interest rates higher than they can afford.

Leger stumbled into a different kind of rate trap. He opted for a loan known as a piggyback mortgage, which was popular during the heyday of the real estate boom. Essentially, he divided his mortgage into two loans to avoid private mortgage insurance, which homeowners have to pay if they contribute less than a 20 percent downpayment.

That type of loan is now all but obsolete because of the tighter lending standards that followed the subprime mortgage meltdown and ensuing credit crunch.

Now Leger has a problem. The three-bedroom, two-bathroom house in Atascadea, Calif., that he paid $389,000 for was recently appraised at $80,000 less than that.

And while the mortgage that covers 80 percent of the loan is at a reasonable 5.75 percent rate, the second loan is at 8.5 percent. They are both 30-year fixed loans, he said.

Leger loves his home, but he's wondering whether he should refinance the second loan given that interest rates have dropped so much. But then there's this question: Can he even refinance now that his house is worth less?

He was hoping he could qualify for the federal government's Hope for Homeowners program, which allows the Federal Housing Administration to insure a new mortgage if the lender voluntarily writes down the mortgage principal to 90 percent of the new value of the home. But when he asked his bank about that, he was told he would have to be on the brink of foreclosure or have an adjustable-rate mortgage.

Leger, 51, is frustrated. He has not been late on his mortgage payment, but has a depreciating property and a loan he's not happy with. So he's asking himself: Why should he have to suffer when so many other homeowners are walking away from their properties?

"You have to be late on your mortgage to get any help," he said. "I don't want to go that route. It's no fun when your house is upside-down by $80,000. I didn't create it. I didn't walk away from my mortgage. I didn't miss my payment."

I can understand why Leger is frustrated. Your home is probably the biggest investment you will make and watching it lose its value is a painful thing. Leger is not alone. In some parts of the country, home values have dropped more than the 20 percent or so that Leger's has depreciated.

Unfortunately, that makes refinancing very difficult.

Greg Fernandez, president of National Capital Wealth Management in McLean, actually called one of the country's major banks when I asked him to offer Roland some advice. "Because of the negative equity situation, the representative seemed to want to get me off the phone very quickly," he said. "When I asked if he suggested I negotiate the interest rate on the second mortgage with my lender, he stated I could try but chances are they wouldn't negotiate."