Deja vu with a Downpayment

I have been salivating all summer long over incredibly low mortgage interest rates. I've been watching rates the way some people keep track of sports stats or lottery numbers.

The problem is, I can't refinance and get one of these great low interest rates unless I dump a ton of money into the house, first.

Since we purchased the home in October 2007, it has dropped in value close to 10 percent. Considering how lousy the market is in other parts of the country, I suppose this drop isn't catastrophic, particularly since we have no plans to sell the house.

Here's the real problem: In order to get the best interest rates for a refinance, I have to have 20% equity in the house. I did have 20% equity when we bought it, but now that the value of our home has dropped I don't. So to refinance the home with the lowest possible rates, I will have to do two things: 1.) Pay closing costs out of pocket, up front; 2.) Pay down the mortgage to bring me within the 20% equity requirement.

So what are we going to do? In order to refinance, we're going to have to raid our savings to replace evaporated equity. We're going to have to come up with another downpayment for the house we already live in.

And unless we want to keep paying on a mortgage with a higher interest rate, we don't have a choice. According to this New York Times piece, it may be twenty years before my house is worth what I bought it for. And last month, there was a 27% drop in housing sales, far worse than anyone predicted.

Moreover, if the economy continues to tank, and housing prices continue to drop, it's likely that we soon won't be able to afford to refinance the home -- the amount we'll have to bring to closing will be too great.

Better get that paperwork in.