Yesterday I received an email from a Consumerism Commentary reader who has a question about her mortgage refinancing options and is looking for advice. I tend not to offer too much personal advice, but I responded with some thoughts and offered to open up the discussion to other readers. Please read through and see if you have any thoughts for Heather. Please feel free to leave a comment after this post.

Hi. I’m a long-time reader of your blog, occasional commenter, and I thought you might have an opinion. My husband and I are looking for advice.

We paid $319,900 for our house almost four years ago. We put $120,000 down and got a 30-year fixed at 5.875%.

We were looking at refinancing and were offered 5% with one point, making the total loan around $196,000. We anticipated our house currently being worth roughly $220,000. Using the Fannie Mae Refinance Plus Program, since we did not previously pay mortgage insurance, we would not need to again.

Our appraisal just came in at $190,000. If we want the same rate, we’d now need to pay 2.3 points, which would put our loan at roughly $198,700, which is both a much larger up-front cost but more distressing, it immediately puts us upside down.

We’re not sure if this is still a good decision. Do you have any thoughts?

I initially responded to Heather some additional questions to clarify her situation. Here are more details.

Q: Do you intend and reasonably expect to stay in the house or do you think you might sell and move within the next few years?

A: We are reasonably planning to stay in this house. (In my ideal world, we’d move closer to where I work, but in real life, after having lost so much value and sinking $60K into structural repairs, we’re not going anywhere.)

Q: Are the monthly payments unmanageable with your current mortgage?

A: Our monthly expenses are not unmanageable at all. Besides the mortgage, we have one car loan and one student loan, but no other debt. Both of us are teachers, and both of our districts both gave pay cuts and increased copays/deductibles. So while expenses aren’t necessarily going up, our income went down. My husband decreased his 457 contributions, which I didn’t agree with but it was a fight not worth fighting.

Q: How do you intend to use your freed-up cash flow (such as invest, pay other bills that are being neglected, save, etc.) if you don’t mind sharing.

A: At this point, the $120-ish per month that we’d save would really allow us not to cut back as much. I have a few side interests that I’m hoping will turn profitable, but in the short term, I can’t count on that at all. (I’m good with ideas and with doing, but I’m not good at marketing/selling myself. Working on it.)

Also, we gave the nice refi guy $495 to lock the rate and get the ball moving. At least $350 of that is not refundable, as it paid for the appraisal. I don’t know at this point if the remaining $145 is refundable or not.

We need to get him an answer in the next couple of days, as far as I know.

Happy to answer any other questions as wanted/needed.

Do you have any suggestions for Heather? Please feel free to leave your thoughts in the comments.

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