Dear Dr. Don,
I purchased a home in 2008 for $252,000, put 20% down with a mortgage rate of 5.75% for 30 years. I would like to refinance but the home is now worth $190,000. So, I would have to come up with an additional 20% (which is not a problem) to get a 15-year mortgage at 4%. My concern is this home continues to drop in value and I am not sure when that will end.
-- Conflicted Cheryl
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I understand your frustration. Having to put up a large cash payment at closing to qualify to refinance makes it seem like you're throwing good money after bad by investing in this house.
While we don't know where the bottom is in home prices, unless you plan on walking away from the house, and I'm not counseling you to do that, you made the investment in the home when you bought it. Refinancing is just looking to reduce your total interest expense in the home while you own it.
A "cash-in" refi to capture today's low interest rates can make perfect sense. The Bankrate feature, "'Cash-in' refinance activity skyrockets" gives you more details.
If you are worried that home prices in your market will continue to fall, selling your house and renting also can make sense. It's possible that you'd have to bring cash to that closing, too.
There's a risk there as well. If home prices start to rise and you're in a rental, you could be sitting out a rally in home prices while potentially facing higher rents.