- The Washington Times - Friday, June 6, 2008

I recently applied to refinance my ]adjustable-rate mortgage to a fixed rate. My mortgage balance is about $348,000. We purchased the property for $450,000 about three years ago and put down 20 percent. The lender is now saying that the property will only appraise for $425,000, and if I want to refinance, I would have to pay private mortgage insurance. We were very disappointed to hear that our property has fallen in value, but I couldn’t argue with the loan officer when he told me about the recent sales in my neighborhood.

Is there anything that can be done if I want to fix my ARM to avoid paying private mortgage insurance?

A. You and thousands of homeowners are in the same boat. While I have always preached that real estate has proven to be a good investment over time, it doesn’t mean there will not be periods of value declines. After the remarkable real estate boom experienced in the latter half of the ‘90s and the first half of this decade, it should surprise no one that a correction would be in order.

There are indeed, some alternatives that you may want to consider. Let’s look at all your available options.

m Stay put. Do not refinance the ARM. If your ARM has not adjusted yet, you may be pleasantly surprised when it does. Short-term rates are low, thanks to the Federal Reserve’s rate cuts over the last several months. Adjustable-rate mortgages are tied to short-term interest rates, and it is highly likely that your ARM will only adjust to about 6 percent when the time comes. Your payment shock is likely to be minimal. The downside of staying put is obvious: You will still be subject to future interest rate increases. Interest rates will rise eventually. We just don’t know when.

m Consider refinancing to a fixed-rate mortgage that carries lender-paid mortgage insurance (LPMI). For those of you who are unfamiliar, private mortgage insurance (PMI) is a monthly premium paid by the borrower when the loan amount exceeds 80 percent of the property’s appraised value. In lieu of PMI, some lenders offer mortgage programs with LPMI. Instead of paying a separate PMI premium, an LPMI loan simply means that the interest rate is slightly higher.

m Do you have a reasonable savings account? If your property appraises for $425,000, a conventional loan without PMI or LPMI would have to be limited to 80 percent, or $340,000. Perhaps it makes sense for you to transfer $8,000 from your savings or investment account into your home’s equity and take a lower loan amount in order to receive the lower mortgage rate.

m Consider a home equity line of credit. Perhaps you already have one. Despite the credit crunch, lenders are still making home-equity loans. A $10,000 equity line would allow you to use $8,000 to pay down the first trust and allow you to refinance to an 80 percent loan, eliminating PMI or LPMI.

A good loan officer can run specific numbers that pertain to your situation. This will determine what, if any, option is the best course of action.

@ pmcmortgage.com).

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