Here's my situation:

- $410k home bought on 10/05
- 80/15/5 loan
  - 80% 5/1 ARM @ 5.375% [$315k remaining]
  - 15% 15yr fixed @ 7.5% [$50k remaining]
  -  5% Down payment
- The House next door (identical, since we live in a townhouse) has been on the market at 290k for 1 month.

Unfortunately, we bought our house at a bad time, and we are now upside down. We can afford our mortgage, and I am currently paying down the 15yr fixed down as quickly as possible (an extra $600/mo). However, I'm afraid that when the 5yr ARM is up, we'll be unable to refinance the mortgage since we are upside down by so much.

The main concern here is the ability to refinance when the 5/1 ARM resets. As of today, I'm willing to toss up to 30k of savings into the 15yr fixed to try and get it paid off before the 5/1 ARM resets. With this aggressive strategy (30k down and an extra $600/mo) I'll have the 15yr fixed paid off in two years. At that point, the 5/1 ARM should be at $300k and hopefully the market has shifted such that I'd be able to refi.

My question is this: 'Am I better off paying down the 5/1 or the 15yr?' When refinancing, I believe they look at all the liens on the house, not just the loan in question. Thus, since the 15yr has a higher interest rate, I'm better off paying down that one.

Are there any other suggestions or approaches?

Thanks

Update 3/11/08
Update 3/12/08
Update 7/21/08

Kudos for actually taking your medicine and paying as agreed.

My recommendation would be to pay down the loan with the highest interest rate, as any subsequent lender in a refinance will, as you state, look at the outstanding amount owed and consider making a load based on a loan to value analysis using an appraised value.

Example: If you pay off the 15-yr fixed then you would owe about $300K+ on a home worth (hopefully) $300K+. When the arm resets you can hopefully find another 100% refinance. If you had paid down the 5/1 ARM by the same amount you'd be in the same spot, except you would have paid more interest in the mean time on the 15-yr fixed.

Best of luck!

Are you sure you are upsidedown by as much as your neighbor's house would seem to suggest? I did not think housing prices had dropped by that much anywhere. Hopefully you'll be able to refinance whatever is left before the reset. Check those credit reports to make sure they are clean. Consider writing a letter to your lender and asking if they will replace the loan with a fixed 30 year at a more competitive rate. Can't hurt to ask and you might get a favorable response....

Tough situation,

Don't give any more money than you must to your current lenders to stay current. When refinance time comes around, the 50k in your pocket will encourage the new (or old) lender to deal with you, even if the collateral does not cover the entire loan amount.

This way, you will also be in a position to benefit from any national 'principal forgiveness' or 'refi' deals; or walk away with 50k in your pocket as a last resort.

Play your cards (in this case, your 50k) close to your chest.

Where do you live? The way things are going your house could be worth $250k by the end of the year if the house next door is already at $290k. I would keep my money in the bank as everything you put in it will be lost and let the government save me.

DavidScubadiver said:Are you sure you are upsidedown by as much as your neighbor's house would seem to suggest? I did not think housing prices had dropped by that much anywhere. Hopefully you'll be able to refinance whatever is left before the reset. Check those credit reports to make sure they are clean. Consider writing a letter to your lender and asking if they will replace the loan with a fixed 30 year at a more competitive rate. Can't hurt to ask and you might get a favorable response....It depends on the area. Mine is almost the same as OP's (20% - 40% down).

bobes said:lindylady said:One question. When does the arm reset?

I'm guess right around 10/2010 since the home was bought in 10/05
I've heard of both 3 and 5 year arms and my advice is different if 2008 then 2010.
By 2010 prices could have changed a lot more either up or down.

i think you should talk to your lender before you decide to pay the loan . Please wait for some time and see all available options .

Wow, really tough situation. First I wish you the best of luck. My problem with this and I know two people going through the same thing is that your house will "probably" never be an asset - as long as you own it. It its worth $275k and you paid $410k, then you are upside down $135k. If we bottom out in a few years and your house bottoms at $275k and returns to normal appreciation (depending on area) lets say that's 4% annual. I don't have a financial calculator, but at that rate you probably be lucky to break even in 50 years. So you would end up paying several hundred thousand dollars for a house that is worth $400k in thirty years. I think that means 30 years of PMI too. There is obviously a lot of speculation here, but according to the average returns on real estate, you are screwing yourself I think. Maybe short sale and a happy retirement? If this were me, I would risk my future on a building.

I wouldn't sweat your situation to much. As others have said pay down the 2nd lien the quickest. Don't drain your savings before you have to.

I'm assuming you have a standard 5/1 arm. Given that the 1 yr libor index is at 2.75 (about) your first reset will be your margin (standard conforming is 2.25%) plus the libor index 2.75 = 5.00% - pretty shocking hey? Of course your arm will reset in 2010 and today's rates really aren't applicable. Most conforming arms only allow a 2% adjustment upwards for the first reset so your max rate will be 7.375 or less and your loan will have a lifetime cap of 10.375.

So why do I mention that? While a resetting rate might sound bad, in this case if it were to reset today it would be beneficial to you. I'm not saying gamble on where rates maybe 2.5 yrs from now but the reset might not be so bad when it does happen. Just keep an eye on the 1 yr libor.

If you can get the 2nd lien paid off you'll have a pretty good shot at doing a rate & term refi at 100% financing in 2 yrs (worse case) however be advised mortgage insurers want at least a midscore between both borrowers of 680.

Don't focus to much on the neighbors sale price, there are a million factors that could be at work there.