Mortgage/financial question

[Princesca]

Step 1. $1000 emergency fund in cash, in an account that you can access if you need to.

Step 2. List all your debts, smallest to largest. Make minimum principal+interest payments on your house and all other debts but the smallest. Pay that one of like crazy. When you're done paying it off, roll that payment into paying off your next biggest debt, and so on, until they're gone.

Step 3. Create an emergency fund of 3-6 months living expenses.

Step 4. Pay off your house like crazy.

At least, that's how I would do it.

 

[cats mom]

FYI,

I/O mortgage & house worth less than you paid = underwater.

I think some folks are throwing out the idea that the OP could have put a sizeable downpayment on the house. Probably unlikely, but possible.

Personally I think very few people have the financial discipline to use an I/O mortgage to their advantage.

I'm amazed at how incredibly stupid some of the innovative affordability products offered in the past few years were. Not saying that's necessarily true in your case OP, just speaking in general terms.

 

[seashoreCM]

In hindsight, how much more per month could you have paid to the mortgage loan?

If you could have paid somewhat more per month and did so over the past several years then the principal balance would now be smaller and the total number of dollars worth of interest only due each month would also be somewhat smaller today. In turn this leaves more of y our dollars to apply to principal each month to make the principal balance go down even faster.

Now let's suppose that the monthly payment adjusts upwards to one and a half times what it was when you started, which I estimate as being three times what it is now. Would you be in trouble? If so then your financial situation was shaky all the way along from when you bought the house.

 

[leslie826]

Wow, I had no idea I'd get so insulted by asking this question. Thank you to all who stood up for me and gave good advice! Although it was not the smartest move, we were given some poor direction from some people we thought we trusted. We were young and were told we could just refinance after a few years...not knowing that wouldn't be possible if the market crashed. Anyway, I guess it is a better idea to put the money in savings right now with the possibility to pay down the principal if we choose to later. I am a SAHM with small children, and in a few years when my kids are in school I'll go back to work and really start to put a dent in paying down the house and saving for retirement.

 

[punkin]

Just read this thread to DH. His question was "How attached are they to the house?" This is a perfect strategic default situation. The only thing that would make it better is if OP was in an non-recourse state (well you can't have everything).

I know that option is unpopular around here, but really, why stay in this house?

 

[Tink-aholic]

It is amazing what otherwise "wise" people do...or at least people who think they are, anyway.

I am in the process of a divorce. When we signed for our mortgage, it was an interest-only for the first ten years. My husband had "blemished" credit and that was the best rate we could get at 6.875%. We had the understanding that we were going to pay the interest off and save any extra in a separate account (a la "Rich Dad, Poor Dad") that started with a pretty big inheritance that I received from my dad. He paid all of the bills and I trusted him (big mistake). Four years later, I found out that he had been funneling the money out into his "private" account and still nothing but the interest had been paid on the house.

One year from that point, and I had paid an additional $4400 on the principle and paid for a new roof. I have just barely enough to refinance (I have about $70K and the appraisal was about $11K under the value of the loan). I also am lucky to have a very stable job, but I am the sole support for my teen.

There is SO much I would have done differently. I wish I hadn't trusted my husband. I wish that banks would have to notify a spouse if large amounts of liquid assets are transferred from a joint account into a single account. But I also wish that we had a traditional loan so I would have more equity by now.

 

[leslie826]

DH was looking to refi our house again given the ridiculously low interest rates currently out there (this was a bit of a joke since we just refied 2 months ago) and I suggested we do an I/O in jest...didn't go over too well.

OP, based on everything, it seems you really can't afford the house you are in. If it was me, I'd get rid of the albatross around your neck and purchase something I could afford.

I'm just wondering how you'd suggest I do this? Foreclose? We've never had a problem paying our mortgage, and in fact now our problem is having extra money. My credit score is over 800 and I certainly am not going to risk ruining that. If you'd like to buy my house, I'd gladly get rid of it.

 

[leslie826]

It is amazing what otherwise "wise" people do...or at least people who think they are, anyway.

I am in the process of a divorce. When we signed for our mortgage, it was an interest-only for the first ten years. My husband had "blemished" credit and that was the best rate we could get at 6.875%. We had the understanding that we were going to pay the interest off and save any extra in a separate account (a la "Rich Dad, Poor Dad") that started with a pretty big inheritance that I received from my dad. He paid all of the bills and I trusted him (big mistake). Four years later, I found out that he had been funneling the money out into his "private" account and still nothing but the interest had been paid on the house.

One year from that point, and I had paid an additional $4400 on the principle and paid for a new roof. I have just barely enough to refinance (I have about $70K and the appraisal was about $11K under the value of the loan). I also am lucky to have a very stable job, but I am the sole support for my teen.

There is SO much I would have done differently. I wish I hadn't trusted my husband. I wish that banks would have to notify a spouse if large amounts of liquid assets are transferred from a joint account into a single account. But I also wish that we had a traditional loan so I would have more equity by now.

Thank you! Yes, every situation is different. And I'm sorry about yours...that stinks. With DH being self-employed his income is not verifiable and although we have excellent credit, it is very hard to get conventional loans. Live and learn.

 

[punkin]

I'm just wondering how you'd suggest I do this? Foreclose? We've never had a problem paying our mortgage, and in fact now our problem is having extra money. My credit score is over 800 and I certainly am not going to risk ruining that. If you'd like to buy my house, I'd gladly get rid of it.

Yes, foreclosure. If I understand you correctly, you've lived in this house for 5 years and paid not a penny into principal. You also have absolutely no equity in the house. You never said if you actually put any significant money down, but somehow I doubt it (NoVa real estate did not fall off all that sharply). So, you will put an extra $800 into a hole that will still not give you any equity in the house...or you can strategically default, take the credit hit, and move on.

About buying your house... I live in a small, old split level. I'm sure your house will be much to grand for me.

 

[leslie826]

Yes, foreclosure. If I understand you correctly, you've lived in this house for 5 years and paid not a penny into principal. You also have absolutely no equity in the house. You never said if you actually put any significant money down, but somehow I doubt it (NoVa real estate did not fall off all that sharply). So, you will put an extra $800 into a hole that will still not give you any equity in the house...or you can strategically default, take the credit hit, and move on.

About buying your house... I live in a small, old split level. I'm sure your house will be much to grand for me.

Yes my tiny 2 bedroom townhouse is practically a mansion...I had such high aspirations when we bought this place. And yes, the real estate around here did fall that sharply. We bought for $330k (put 20% down - wow, we actually did lose money!) and now the houses are selling for $140's.

 

[disneymarie]

We have a mortgage that had a 5 yr ARM and is interest-only for 10 years. Our ARM is up and our mortgage payment has gone down by half! To this point we have only been paying the interest, no extra toward principle. I am nervous about the future of our rate adjusting, but we cannot refinance because are house is not worth now anything near what we paid for it. Here's my question: Do we take this extra $800 a month that we have now and put it toward principle? Or do we put it in an IRA? ( DH is self-employed and we have no retirement. All we have is 3 months salary in a savings acct.) Thanks for any advice!

I thought there were gov't programs especially for this circumstance for people to keep a home in a market that went upside down. I know Pennsylvania Housing and Fianance Association has these programs.

The time for refinanacing came and went. Now there needs to be drastic measure. One hand what if the market comes back in 10 years and the house is worth it. How do you get an apartment when a credit check is going to be done if you forclose? And is the amount you will put into the home the amount you would pay in rent.

For the last five years if the principal had been placed into a CD then in 10 years pulled it out. It should have been illegal to banks to give these loans....look what banks had to be bailed out by our tax dollars due to this lending.

I hope that the best option is available to you. Talk to the mortgage company they know what your options are for federal programs available.

 

[punkin]

Yes my tiny 2 bedroom townhouse is practically a mansion...I had such high aspirations when we bought this place. And yes, the real estate around here did fall that sharply. We bought for $330k (put 20% down - wow, we actually did lose money!) and now the houses are selling for $140's.

OK, so you lost $66K - it's a sunk cost, gone now and you still owe $264K on a $140K house. You will have to pay (at least) $126K over the next 5 years in order to owe the entire worth of the house. That's an extra $2100 per month extra just towards principal. At that point your loan recasts and you would have to start paying back principal in addition to interest (and you still can't refi because you have no equity). However, you will only be paying interest on $140.

Now assuming you only sink $800 additional every month for 5 years (which is the money you have available). That gives you 48K, which still leaves you with $217K that you owe on a $140K house, where you now have to start paying interest and principal on that amount.

There is also an assumption here, that interest rates won't back up (which, since they are at historical lows right now, I wouldn't count on) and your house won't go back up in value (anybody's guess at this point. It may, after all be worth $330K again in 5 years). Also, you will be living in a small 2 BR townhouse with 3 growing children.

What I would do in your case is put the extra money in an account that can't be touched by creditors (IRA/Roth IRA) and continue paying the interest only for another 5 years and just consider it cheap rent. In another 5 years when your mortgage payment shoots through the roof, I would allow foreclosure and start over.

I really am sorry you are in this situation, but IMO (and this really is only my opinion) putting extra money into this sink hole is not going to help you much in the long run.

 

[RitaE]

I agree with Punkin - other than the strategic foreclosure which is a strategy I have an ethical objection to. That's probably best for a different thread.

Save the $800 a month. You have no retirement savings and it appears 3 children? Do you have any college savings? You and your husband NEED to save for retirement probably more than you need to save this house to be honest. Social Security is faltering. Contact a local adviser and ask about a Roth IRAs or something. You can evaluate where you stand with the house when your payments explode and they start asking for Principal payments. Maybe the value will recover over the next five years. I hope so.

@DisneyMarie. So far banks have been reluctant to work on re-negotiating underwater mortgages with these types of terms unless the homeowners are behind on payments. There are thousands and thousands of these loans out there still chugging along and some experts are predicting they might be the cause of a repeat housing collapse. Money magazine recently did a piece on it.

http://money.cnn.com/galleries/2011/real_estate/1108/gallery.mortgage_refinancing_help/

 

[punkin]

I agree with Punkin - other than the strategic foreclosure which is a strategy I have an ethical objection to. That's probably best for a different thread.

Save the $800 a month. You have no retirement savings and it appears 3 children? Do you have any college savings? You and your husband NEED to save for retirement probably more than you need to save this house to be honest. Social Security is faltering. Contact a local adviser and ask about a Roth IRAs or something. You can evaluate where you stand with the house when your payments explode and they start asking for Principal payments. Maybe the value will recover over the next five years. I hope so.

@DisneyMarie. So far banks have been reluctant to work on re-negotiating underwater mortgages with these types of terms unless the homeowners are behind on payments. There are thousands and thousands of these loans out there still chugging along and some experts are predicting they might be the cause of a repeat housing collapse. Money magazine recently did a piece on it.

http://money.cnn.com/galleries/2011/real_estate/1108/gallery.mortgage_refinancing_help/

I so hope you are wrong. Our economy cannot withstand another shock.

 

[MrsPete]

Wow, I had no idea I'd get so insulted by asking this question. Thank you to all who stood up for me and gave good advice! Although it was not the smartest move, we were given some poor direction from some people we thought we trusted. We were young and were told we could just refinance after a few years...not knowing that wouldn't be possible if the market crashed. Anyway, I guess it is a better idea to put the money in savings right now with the possibility to pay down the principal if we choose to later. I am a SAHM with small children, and in a few years when my kids are in school I'll go back to work and really start to put a dent in paying down the house and saving for retirement.

No one intends to hurt you, but this isn't a situation that will garner sunshine and roses in the answer. I totally believe you were young and inexperienced and didn't grasp that this was going to be a mistake -- it's exactly what I was reading between the lines.

OK, so you lost $66K - it's a sunk cost, gone now and you still owe $264K on a $140K house. You will have to pay (at least) $126K over the next 5 years in order to owe the entire worth of the house. That's an extra $2100 per month extra just towards principal. At that point your loan recasts and you would have to start paying back principal in addition to interest (and you still can't refi because you have no equity). However, you will only be paying interest on $140.

Now assuming you only sink $800 additional every month for 5 years (which is the money you have available). That gives you 48K, which still leaves you with $217K that you owe on a $140K house, where you now have to start paying interest and principal on that amount.

There is also an assumption here, that interest rates won't back up (which, since they are at historical lows right now, I wouldn't count on) and your house won't go back up in value (anybody's guess at this point. It may, after all be worth $330K again in 5 years). Also, you will be living in a small 2 BR townhouse with 3 growing children.

What I would do in your case is put the extra money in an account that can't be touched by creditors (IRA/Roth IRA) and continue paying the interest only for another 5 years and just consider it cheap rent. In another 5 years when your mortgage payment shoots through the roof, I would allow foreclosure and start over.

I really am sorry you are in this situation, but IMO (and this really is only my opinion) putting extra money into this sink hole is not going to help you much in the long run.

While I don't like this answer, after hearing more and more about the situation, I think it is the best overall solution to a no-win situation.

I so hope you are wrong. Our economy cannot withstand another shock.

I personally think we're far from done with this. Overall, we got into this mess because so many people were overextended -- credit cards, houses, whatever -- and it reached the breaking point. We cannot return to the point where we were because that was based upon excessive lending, not real money. Now the government's in the same situation, and we just don't have bandaids left.

Happy thoughts? No, but truthful.

 

[sweetdana]

I would look further into your future.

NOTE: I/O loans have a reamoritzation of no more than 30 yrs. IE at the end of 10 yrs the last 20 have prin and inter payments. It re-amoritized based on pricipal balance and current market rate usually a 2.25% over the 1 month libor. (Currently near 3/4 of a %, hisotrically 2001 was a high at about 5.5%. Meaning the rate would then be 7.75 just an idea.)

1st can you afford the principal and interest payment based on pricipal now? IE if you owe 150K and say assume a 6.5% rate. (remeber it will be a 20 yr amorti, cause you are 10 yrs into a 30 yr loan.)

If yes, I would put 1/2 the $ in the bank and build 6 months of reserves and start paying 400$ per month on principal.

If no, then you need to pay all the pricipal. 1) 45-50K less pricipal in 5 yrs, even if you can not afford that 20 yr am payment with 50K less owed, which you probably could, you can refi into a 25-30 yr or sell it. You should have equity though paying pricipal and home raising in value. (800$ in pric per month, for 5 yrs.)

 

[sweetdana]

For those of you stating a statg forec. PLEASE realize bank can come after for the diff, of home sold/owed amount. Some states have limited non-recorse rules, but if there is fraud involved this is never the case. As well there are only 7-12 states that have this, and the diff is circumstanses.

Nearly always if cash was taken out even a few $$, specially for ccs adding a roof ect, 2nd mortgage used to avoid PMI, and sometimes just the alternative loans (Many interest only loans are recoarse loans by nature of being an alternative product.)
Most states have no rules at all and can place a judgement on your name and garish your wages and/or tax refunds.

Having say 50K from savings over the prev 5 yrs, would def qualify and be looked at mis-managment not due to not being able to afford a payment.

I do not agree with anyone thinking that adding her principal into retirement and plan a foreclosure is a sound peice of advice. .. yes it may work .. and it may make things MUCH MUCH MUCH MUCH MUCH worse. Startng with her payment may be less than rent in the area, and will not own a home for a # of yrs again.

If you have no options, forecls happen;however please ignore the advise to plan this.

 

[timmac]

No really. All of us accountants sit around in our conference rooms nightly speaking of our love for creative real estate financing.

Interest only real estate loans used to be the love child of the house flippers - who were generally planning on holding onto the property for less than a quarter of a year and didn't have a speck of desire to pay down the principal before a sale.

As we have seen, they are deadly in times of rising interest rates and declining property values.

I/O loans make perfect sense if you're in the real estate market purely for investment. It's the ultimate way to invest using OPM (other people's money)... you have no invested stake in the purchase, but any changes due to market fluctuation are pure equity in your pocket.

Now, thinking of one's own home in which they live as though it's an "investment" is not really such a good idea.

Also, a few PPs have alluded that "living in a home" = "going to pay if off eventually". Not sure I'd agree with that either. A savvy investor with a decent rate on their mortgage is far better to keep a mortgage forever if they can.

 

[Darcy03231]

OP - This isn't directed at you so please don't take it personally. Earlier on in this post I suggested putting the extra money toward your principle and I stand by that.

Stepping on my soap-box.

I put some blame on the banks and lending institutions for the mortgage crisis, but when someone borrows money (for whatever reason) I believe they have an obligation to pay it back. Doesn't matter if the security goes down in value (car loans anyone?). Rarely do you buy anything on credit that goes up in value. Usually the goal with home ownership is to own your house at the end of the loan period. While some residential properties are bought as investments, the vast majority of them are bought as homes for families to live in. I do think that the banks should do everything possible to work with people to try to keep them in their homes even if that means extending the loans longer to keep the payments affordable. The banks/lending institutions were part of the problem, so they should be part of the cure, but advising someone to walk away from their obligations to me is morally wrong. When one takes out a loan you know the amount you're borrowing, the interest rate, what the payments are and what you will ultimately pay over the life of the loan. When the papers are signed, you agreed to pay it. There were no special clauses about what happens if the collateral goes down in value, if the economy tanks, etc. When you sign on the dotted line, you agreed to owe the money. Period.

Off my soap-box.

 

[cats mom]

Normally I'm a proponent of paying down principal as quickly as possible. But I wouldn't sink another dime into that townhouse right now if I were you OP. That doesn't mean I think you're automatically headed to default, I just think you leave yourself more options by putting the money elsewhere. I would definitely save like crazy though!