Pimp my mortgage: should I refinance under HARP?

[caninelover]

So here is my situation:
Bought my condo in 2003 for $245K. Refinanced in 2005 to a 20 year fixed at 5.25% (my current mortgage). Current mortgage balance is about $180K. Condo is worth about $160K today. I had run my address through Fannie's online tool before and it always said they didn't back my mortgage. I finally got around to calling Bank of America to double check and it turns out - Fannie does own it. No wonder Fannie imploded on itself, they don't even know what they own but that's another story I guess.

Options:
1. I started the paperwork on a HARP Refinance. Apparently (at least according to BofA) the high LTV ratio doesn't qualify me for 15 yr fixed (which is what I would have preferred) but I can get a 30 yr fixed at 4.25%. This would lower my monthly payment by ~ $600 / month, but obviously this stretches out the loan term; and since I'd be paying principal down at a slower pace this would leave me underwater for awhile.

2. I can do nothing and keep my current mortgage. Assuming the market doesn't drop further, I would at least be caught up to the value in 2 yrs. My current payment is very manageable against my monthly take home.

I would be living in this condo for the foreseeable future, but once I FIRE I would probably relocate and sell it. But that would be about 15 or so yrs away, unless the DOW helps me out and soars to 12,000,000 this year.

I've run some numbers through excel and it basically looks like the refinance gives me the flexibility of a lower payment, but I pay down the principal much slower...meaning I'm probably underwater for awhile (unless I paid $ on top of the normal payment). Staying in my current mortgage I'll at least get to even with the market in a couple of years. So I'm kind of on the fence about whether to move forward with the refinance or not.

Thoughts or advice, please? Thanks in advance.

 

[RetireBy90]

I would suggest that if the 30yr is the only option for refi, then get the 30yr at 4.25% and make the extra principal payments like it is a 15yr. It gives you flexibility if something was to happen but if not then you would have it paid off in 15yr. I recently did a harp refi and stayed with a 30yr fixed. The only downside is the increased interest rate on the 30yr vs 15yr. If you can be disciplined enough to make the larger payment even though you don't have to, what is the down side?

I did mine through wells, and they covered most of my closing costs and no 1% fee. I'd be carefull looking at the costs on the HUD1. Like I'm sure you were with current and initial mortgage.

 

[donheff]

You forgot the option of taking the refi and banking the extra $600/mth. Then you can pay off the mortgage whenever you build up enough savings or put a down payment on something else if you bail on the condo.

 

[RetireBy90]

You forgot the option of taking the refi and banking the extra $600/mth. Then you can pay off the mortgage whenever you build up enough savings or put a down payment on something else if you bail on the condo.

Great point. In effect that is what I'm doing. I figure in 5 or 10 years, having a loan at 4.5% will be something you tell you grandchildren about. It would be great to enter retirement without a mortgage, but I've kept free of paying extra because I think my investements will pay more than 4.5%, not counting the tax benefit which takes the effective rate to about 3%. Shoot - a 30 year Treasury pays 3.14% this morning. Course, then I'd have to pay taxes on the interest...

 

[caninelover]

Thanks. I'm thinking about taking both approaches, just paying my current payment each month and putting the rest towards principal until I at least get to the 'water line' on the place. It bothers me being this much underwater.

At that point I can either keep doing that or take the extra $ and bank it. I've read most people who do a HARP refinance didn't have to get an appraisal but BofA told me I needed to get one. No big deal but I wonder why.