Time to refinance is now

"The risk they're taking is that rates will be no worse in a year, but their house will be worth less than it is today," Lepre said.

Shake-out may take a few years

How do we know home values will be less next year? We can't know for sure, and in some still-strong markets they might still be inching up.

But both Lepre and I have been through real-estate recessions, so we know things can get pretty bad before they get better. So has commentator Scott Burns, who noted in "Housing horror could hang around for years" that home prices in many Texas and California cities took a decade or more to recover from their respective slumps. Lepre believes that many homeowners in declining markets might have to wait five years or more before their homes are again worth what they're worth today.

• Video: Mortgage rescue rip-off

That's because foreclosures are almost certain to continue rising. One quarter of the households whose loans are resetting in the next year or so are at risk of foreclosure, according to the U.S. Department of Housing and Urban Development. Banks won't want to hold on to these money-losing properties, so they're likely to dump them at fire-sale prices -- further depressing values in the affected neighborhoods.

If you're considering whether to refinance:

• Do some math. Try to get a bead on what your house is worth now by asking at least three real-estate agents for "I need to sell it fast" estimates. A review of recent home sales in your neighborhood may help you establish a value and the price trend in your area -- up, plateauing, dropping, falling like a rock. Divide what you owe by what your house is worth to determine your loan-to-value ratio. Now do the math again, assuming home prices drop 10%. If the results make you queasy, you might want to start shopping for a new loan now.

• Consider fixing the interest rate for at least as long as you'll be in the house. Signing up for another loan that adjusts before you're ready to move just puts off the problem to a time when you may have less equity -- and less leverage.

What if you've already waited too long and don't have enough equity to refinance? If that's your situation, and you're having trouble making the payments, contact a HUD-approved housing counselor immediately to discuss your options. Read "Facing foreclosure? 9 options" and "Your lender doesn't want your house" for alternatives and strategies.

You also should contact your lender. Under pressure from regulators and lawmakers, some lenders are restructuring loans to fix rates and lower payments for stricken borrowers.

"Countrywide just announced plans to refinance or restructure mortgages for some 82,000 customers," said Elizabeth Razzi, author of "The Fearless Home Buyer." "Borrowers should definitely contact their current lender to see if they are offering an easier way to refinance."

Liz Pulliam Weston's latest book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

< previous |  1 | 2 |