Mortgage/financial question

[timmac]

Save the $800 a month.
...
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.[/url]

This.

That $800/month over five years is $48,000. If it's invested in something decent between then and now, could be worth much more (at 5% return, about 54k, at 7% return, about 57k)

Do we know if the interest rate is fixed or variable come 5 years from now? If it's fixed rate, lower than what you can get investing, then that money socked away now could well help to more than make up the difference when it's time to pay P+I. (and at which point I'd pay only the minimum as long as possible)

But, these are what ifs, of course.

 

[timmac]

Earlier on in this post I suggested putting the extra money toward your principle and I stand by that.

Not everyone agrees with this, but it's a reasonable opinion, of course.

but when someone borrows money (for whatever reason) I believe they have an obligation to pay it back.
...
When you sign on the dotted line, you agreed to owe the money. Period.

I do generally agree with this; I'm not a fan of strategic foreclosure... it's things like that which don't help the economy.

My question with what you're saying, is that you seem to be equating the two things here. Following through with the terms of the loan doesn't necessarily equate to paying down principal right now.

I'd still stand by the opinion that saving the extra (and investing in low risk opportunities) leaves far more flexibility come 5 years from now.

 

[vitalogy]

my mortgage company sucks

 

[vitalogy]

 

[Darcy03231]

Not everyone agrees with this, but it's a reasonable opinion, of course.



I do generally agree with this; I'm not a fan of strategic foreclosure... it's things like that which don't help the economy.

My question with what you're saying, is that you seem to be equating the two things here. Following through with the terms of the loan doesn't necessarily equate to paying down principal right now.

I'd still stand by the opinion that saving the extra (and investing in low risk opportunities) leaves far more flexibility come 5 years from now.

Of course the OP know herself and her spending habits better than all of us, but its been my experience that most people aren't disciplined enough to put that money away and not touch it. If money is sitting in savings there's more inclination to use it for purposes other than what you originally intended. I think it pretty easy to say "Oh, there's $10,000 sitting in savings, we haven't had a vacation in a while let's take a trip," or buy new furniture or a new car, or the kids need braces, etc.

I guess I subsribe to the theory that once money is paid out for the intended purpose, its then impossible to spend elsewhere.

 

[timmac]

Of course the OP know herself and her spending habits better than all of us, but its been my experience that most people aren't disciplined enough to put that money away and not touch it. If money is sitting in savings there's more inclination to use it for purposes other than what you originally intended. I think it pretty easy to say "Oh, there's $10,000 sitting in savings, we haven't had a vacation in a while let's take a trip," or buy new furniture or a new car, or the kids need braces, etc.

I guess I subsribe to the theory that once money is paid out for the intended purpose, its then impossible to spend elsewhere.

This is a very good point... but... "then it is impossible to spend elsewhere" can backfire as well.

 

[RitaE]

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.

I understand your opinion Dana and even agree with parts of it. However I've personally never seen a case where a bank or the courts have claimed fraud or mismanagement over a borrowers choice to fund a retirement account while making the contractual mortgage payments (which at this time is solely interest).

In fact, the legal system is so adamant about this that except in extremely rare cases retirement funds are protected from judgment.

This is especially true in a case like this were the family is self-employed and not likely to be eligible for any sort of pension or company sponsored retirement plan. This family needs a retirement savings strategy. At the moment, putting the $800 a month into is about the best choice I see from them because unlike principal sunk into an underwater mortgage - retirement savings are legally protected and recoverable.

Heck, maybe the self-employment income will exponentially increase in the next five years and the house value will recover and they'll be able to re-finance. That'd be a great scenario.

 

[punkin]

I understand your opinion Dana and even agree with parts of it. However I've personally never seen a case where a bank or the courts have claimed fraud or mismanagement over a borrowers choice to fund a retirement account while making the contractual mortgage payments (which at this time is solely interest).

In fact, the legal system is so adamant about this that except in extremely rare cases retirement funds are protected from judgment.

This is especially true in a case like this were the family is self-employed and not likely to be eligible for any sort of pension or company sponsored retirement plan. This family needs a retirement savings strategy. At the moment, putting the $800 a month into is about the best choice I see from them because unlike principal sunk into an underwater mortgage - retirement savings are legally protected and recoverable.

Heck, maybe the self-employment income will exponentially increase in the next five years and the house value will recover and they'll be able to re-finance. That'd be a great scenario.

I can't see any possibility of "fraud" here either. Like I said before, you never know what the situation will be like in 5 years. For all we know, the real estate market will take off and OP will be able to refi.

However, at present the OP has no savings and is living on one income with 3 young children. I would not put a single penny more into this house than I absolutely had to, and if, in 5 years I couldn't afford my payments, I would have a little conversation with my bank then (with fully funded retirement accounts).

 

[HeatherC]

I'm sorry, I know I will be in the minority here, but OP OWES the bank the money for that house. Why should she be able to do a "strategic foreclosure" when the rest of us are paying back our loans responsibly? That is just wrong.

Every time someone does something like this it just fuels what is wrong with our economy and this country.

Don't get me wrong, I truly feel for OP. But she signed legal documents saying she would pay the bank back money they loaned her. Now it is ok to just say sorry, can't do?

How is that any different than loaning a family member 30K for a car then they turn around a year later and tell you sorry, can't pay you back since the car is only worth 17k now. I am now going to foreclose on the money you lent me.

You borrow money, you have an obligation and moral responsibility to pay it back.

 

[cats mom]

Oh I think plenty of people agree with that viewpoint, and if I'm reading her responses correctly, OP included. I gather she prides herself on her excellent credit rating and the thought of strategically defaulting has never even crossed her mind. But she is in a bad situation with her townhouse.

It's interesting how views have changed though. We had next door neighbors who were foreclosed on about 15 years ago. They told DH and I what was going on, but no one else on our cozy little double cul de sac knew. They packed up and moved in the middle of the night in advance of the notice being posted because they were so humiliated.

Now people run to the media and ask that their story be told, proudly pose for photos, write letters to every elected representative they can think of, hire lawyers to drag the process out so they can stay in the house as long as possible, and otherwise demand taxpayer money to keep them in "their" house (never mind that they have a 0 down I/O loan, or they serial HELOC'd, or otherwise don't actually have a cent of equity in the place... not sure how they figure it's "their" house, but I digress) I don't know where the entitlement mentality came from.

Sheesh, there's a proposed amendment to the California Constitution to ban foreclosures. I swear I thought it was pure satire when I read it, but it has cleared the Secretary of State, and I bet it makes it on the ballet.

One of the key tennants: "It is a fundamental right for every Californian to purchase and own a home and real property."

Are you kidding me? Home ownership as a fundamental right? An entitlement? OK, then I choose a beachfront home in Laguna. It's my right as a California citizen. I just have to get a loan and get in the door and it's mine. Doesn't matter whether I could ever afford it, whether my situation changes and I can no longer make the payment, etc. It's mine and no one can ever get me out. Geez... idiotic!

For anyone who wants an interesting read:

http://www.dsnews.com/articles/cali...s-amendment-outlawing-foreclosures-2011-08-02

Actual initiative:

http://ag.ca.gov/cms_attachments/initiatives/pdfs/i945_initiative_11-0014.pdf

 

[sookie]

ok, if you have a 800+ FICO and also put down 20% down, you got hosed into this loan. thats predatory lending because you were young and didn't know better...

 

[SleepyatDVC]

Good luck to the OP.

I think you got a variety of advice already.

Personally, I would bulk up my EF, savings, and retirement funds as your DH is self employed. Once you go back to work, continue to live on one income and use your paycheck to add to savings and tackle the principal of the loan.

I will assume that you not want to foreclose and will continue to live your current house after the 5 years remaining on your I/O loan, if only because you are stuck. Now if you will NEED to move because of circumstances (relocation) or you will WANT to move eventually (more room), you will need to be extra aggressive with the savings instead of paying down the principal. NOW is the time to think about where you want or need to be in 5 years.

The silver lining for you now is that you have time (5 years) on your hands AND your mortgage currently went down substantially. Use that time and money wisely and don't blow it by using the bigger shovel to dig a deeper hole for yourself to face in 5 years.

Hopefully, in 5 years the market will be better and you won't be as underwater as you are now. Although, I doubt it will ever go back up to the original purchase price, maybe you will be lucky and it will be worth at least what you owe on it.

Also, hopefully your income will be much higher then since you will be back to work and maybe business will be booming for your DH too.

Again, the best of luck to you and your family!!!

 

[punkin]

I'm sorry, I know I will be in the minority here, but OP OWES the bank the money for that house. Why should she be able to do a "strategic foreclosure" when the rest of us are paying back our loans responsibly? That is just wrong.

Every time someone does something like this it just fuels what is wrong with our economy and this country.

Don't get me wrong, I truly feel for OP. But she signed legal documents saying she would pay the bank back money they loaned her. Now it is ok to just say sorry, can't do?

How is that any different than loaning a family member 30K for a car then they turn around a year later and tell you sorry, can't pay you back since the car is only worth 17k now. I am now going to foreclose on the money you lent me.

You borrow money, you have an obligation and moral responsibility to pay it back.

This is a difference in philosophy. I do not see any MORAL objection to foreclosure if it is in the best financial interest of the mortgagor.

ok, if you have a 800+ FICO and also put down 20% down, you got hosed into this loan. thats predatory lending because you were young and didn't know better...

This is not necessarily true. It may have been the only way for the OP to purchase that particular house given her income. Unless there was some fraud involved, this loan was just a bad idea, not predatory. Of course you may be right that there were predatory practices used (only the OP knows) and OP may have some recourse against the lender.

 

[DISNEYSIX]

I came to the party late so this may have already been addressed but Google Fannie Mae Lookup and Freddie Mac Lookup to see if one of them own your mortgage. If so, you are eligible for the HARP (Home Affordable Refinance Program) which allows you to refinance your mortgage up to a 125% LTV (loan to value). Your mortgage servicer can help you with this loan but you really need to refinance your ARM now while fixed rates are at historic lows.

 

[ScottOKW2K]

Several have suggested a 6 to 8 month emergency fund. Since your spouse is self-employed I would suggest that an 8 - 10 month fund would be better since your income is more likely to be variable than fixed. This would help you weather any "lean" months while still retaining a comfortable cushion in case unexpected expenses occur.

Then fund Roth IRA accounts for both of you to the extent possible. I have heard that if one can withdraw contributions to a Roth without penalty, I am not an expert so please verify this detail. I recommend this for two reasone - (1) earnings in a Roth are exempt from income tax and (2) retirement accounts are protected from bankruptcy. I hope the second item never occurs but it is useful to prepare for your future and this helps protect it.

As far ar your loan and being under water on the mortgage - so what? It is what it is. It may cause you problems in the future but I think you would have less heartache and stress across the kitchen table if you have money toward retirement and cash in the bank if/when that happens. If you do that and have some extra left over then you can decide if putting that toward the principal of the mortgage is the best decision for your family. The one advantage of this is that if you were able to get the outstanding principal below the homes worth and the rates at that time are lower than your current rate you might be able to refinance and speed up your payoff. Just an idea.

Good luck.

 

[scrapquitler]

So, in 5 years you've paid nothing down on the principal of your loan and if you continue paying the interest only for the next 5 years you still won't have paid anything toward your principle.

If your plan is to stay in the home and eventually own it outright, I would put the $800/mo toward the principal of the loan. If you do that for the next 5 years you'll have reduced your loan amount by about $50k. At that point you may be able to re-finance into a more conventional loan.

If you don't think you're going to stay there and my sell and move, I would figure how much you need to put toward it each month to get to the break even point.

I agree with this advice. I'd work on paying down the principle to the point that you have enough equity to refinance and get yourself into a fixed rate loan (with as short a term as you can afford).

 

[tlbwriter]

Sheesh, there's a proposed amendment to the California Constitution to ban foreclosures. I swear I thought it was pure satire when I read it, but it has cleared the Secretary of State, and I bet it makes it on the ballet.

One of the key tennants: "It is a fundamental right for every Californian to purchase and own a home and real property."

Are you kidding me? Home ownership as a fundamental right? An entitlement?

Eh, I don't have a problem with that. It's my fundamental right to buy a house if I want to buy a house. And have the money to do so. Ah, there's your problem... is it my fundamental right to own a house even if I don't have the money to pay for it? Um, I think not.

 

[DISNEYSIX]

Sheesh, there's a proposed amendment to the California Constitution to ban foreclosures. I swear I thought it was pure satire when I read it, but it has cleared the Secretary of State, and I bet it makes it on the ballet.

One of the key tennants: "It is a fundamental right for every Californian to purchase and own a home and real property."

This is exactly the mentality that got this country and many countries into trouble. Our federal government wanted everyone to own a home and told the banks to make the loans and that they would guarantee the loans if they went bad (at taxpayer expense, of course). The reason it is so hard to qualify for a loan now is that the gov't guarantee is no longer there.

 

[punkin]

This is exactly the mentality that got this country and many countries into trouble. Our federal government wanted everyone to own a home and told the banks to make the loans and that they would guarantee the loans if they went bad (at taxpayer expense, of course). The reason it is so hard to qualify for a loan now is that the gov't guarantee is no longer there.

Actually, the government always denied there ever was a guaranty. Unfortunately, during the crisis the "implicit" guaranty became explicit and now all conventional conforming loans ARE, in fact guarantied by the government. There are other reasons why loans are difficult to get, but your post is factually incorrect.

 

[FayeW]

Let me get this straight...

The OP has been paying her mortgage for 5 yrs without problems. Due to an adjustment in the interest rate, her minimum required payment dropped by $800 per month and she has the happy dilemma of trying to decide the most prudent way to use this extra money to plan for her family's financial future....and the advice this person who has excellent credit and never had any trouble paying her mortgage was given...is to DEFAULT???

You know, being "underwater" only matters if you are planning on selling your home. If you are happy living in your home and can afford to do so what it is worth is really irrelevant.

I cannot believe that someone actually told her that she "obviously can't afford the home" when not only can she afford it easily, she has extra for retirement, emergency funds and extra equity payments.

I've seen people crucified on these boards for planning on defaulting, now someone who had no intention of doing any such thing is being actively advised to default, for no other reason than it is "strategic" because she owes more than it's worth! That they may love their home and have great neighbours in a great school district means nothing...it's worth less than they owe so they should throw away their personal responsibilities, screw their credit and walk away????

Unfreakinbelievable!