Refi questions.....ARM to Fixed and options

[butter75]

Greetings!  I'm looking for some non-biased advice on a refi.  I've always considered myself an educated fella but unfortunately my knowledge base stops just short of finance related topics.  Kind of scary that I made it this far in life and own a home, yet really have no idea the best way to rectify my situation.  Ok here it goes:

6 years ago bought a home.  New home, listed 280k got it for 250k with incentives....height of the market (well recent history).  Was living with my girlfriend at the time but seeing our relationship was not quite permanent decided to have the home in my name only (plus her credit was crap).  Luckily my credit and income was enough to purchase it.  Financed the full amount 5 year ARM interest only with the intent to make double payments and refi on down the line.

Fast forward:  We were real good about making principal payments (mortgage was ~1300 a month we usually paid ~2000) and owe 210k currently.  The breakdown is 200k (3% variable) at Suntrust where we make an interest only payment monthly and ~10k (7%? fixed) BoA second balloon where I have been sinking the extra added principal.  Both are 30 year.  To be honest I'm completely ok with our scenario...EXCEPT for that 3% is variable.  Man it scares me and I want it gone.

Our finances:  We do ok. Married now.  Joint income 145k 10+ years same jobs very stable/secure, My FICO score I checked last month was 719, hers traditionally has been poor due to late payments while in college but that was more than 8 years ago.   Our credit to debt ratio on CC's is bad (I had a small side business fail and will take a while to recoop the 30k at poor ~11% interest rates) but besides my grad school student loan (20k) we only have a single car payment and it is very modest (300/mo).  Our cash savings sucks.  Life always seems to thwart that.  Man kids are expensive!

Bottom line.  I need to refi.  Soon, like ASAP.  I can't imagine interest rates going any lower.  While I would love a 15 year fixed rate mortgage, it worries me to pay close to my maximum on a mandatory payment (let's say the 15 year would be 1800+ a month and we could only swing 2000 with no wiggle room).  Think I would rather have a fixed 30 year with no early payment penalties and add principal as we have been doing.   Leaves us some monthly cash just encase something bad happens (since we don't have that savings blanket to fall back on).  Thoughts on this?

Possible Monkey Wrench....:  The market is not where it was when the house was purchased.  I'm not completely sure of its value. I'm not sure of the equity we bring to the table and I don't think anyone is doing 100% loans anymore.   I have the basement partially finished but it needs a good 5k more worth of work that we don't have the money for now.  This extra finished 800 sq ft (1 bed room, full bath, workshop, living room) would significantly increase the value in this neighborhood (we have the smallest home design in this complex).  What to do about this? 

Second Monkey Wrench....where I really need advice: The second mortgage we have.....that ~10k just sitting out there at a fixed, yet crappy interest rate.  Don't have the cash to pay it off yet really want it to go away when we refi.  Don't want to refi and stil have 2 payments to make.  Few banks I talked to were not interested at all in rolling this into our other 200k.  Could we possibly refi the 200k portion by taking out 215k, thus paying off the second and finishing the basement?  What exactly is this called?  How much equity would we most likely need to pull that off.??

I realize your answers are somewhat generalizations, but I do appreciate any advice you can offer!

[Doughroller]

Here are my thoughts:

1.  On the 30 vs. 15 year issue, I've always taken the same approach you are suggesting.  I'm more comfortable with the lower payment of a 30 year, but I pay extra every month.  There are two downsides to this approach, however.  First, your interest rate will be higher on a 30 year than a 15 year.  When I last refi'd, however, the spread was not great, and it's even smaller when you factor in taxes.  The second is that many people get the 30 year with good intentions to pay extra each month, but then don't.  With a 15 year, you don't have a choice.  Still, for us, the 30 year was the best choice.

2.  As for the equity in your home, you'll of course need to get it appraised as part of the refi process.  Ideally you want a 20% cushion to get the best rates.  If it turns out you owe more than the value of the home (let's hope not!), you can check out the HARP program as a possible avenue for refinancing.  You'll find details of the HARP program here--http://www.makinghomeaffordable.gov/programs/lower-rates/Pages/harp.aspx

3.  This one is tricky.  A cash-out refi comes with extra underwriting requirements and usually a higher interest rate.  You really want to avoid it if at all possible.  One approach is to have the second mortgage subordinated to the new refi.  It's a bit of paperwork, but it may be the only approach.  You'll still have two payments, but it shouldn't hold up your refi.  We had a second mortgage that actually prevented us from refinancing do to our home's value.  So we spent a year paying it off before we could refi.    I wrote about that story here--http://www.doughroller.net/mortgages/7-lessons-learned-failed-attempt-refinance-mortgage/

Hope this helps and good luck!