If you bought your house at the height of the housing industry and now sit and shake your head at its mediocre value, you are not alone. Thousands of Americans owe much more on their mortgage than their home is worth today. In addition, thousands of other Americans have an ill-fitting mortgage program that gets them nowhere – such as the interest-only mortgage. A loan like this we like to call a “toxic mortgage.” It is a necessity because you need a place to live, but the payments you make get you nowhere. The largest investment of your life is now draining you financially and emotionally.
Your Standard Options
When you have a toxic mortgage, you likely feel trapped. You don’t want to give up on your debt – you are too responsible for that. But, looking ahead, you see no way out. Your head will never get out from beneath the water, at least while you are still young enough to care. What if you cannot afford the payments any longer, yet you don’t have enough equity to refinance? You are in an even worse situation, then. Typically, you have four options when you no longer want the mortgage you have:
- Refinance
- Walk away
- Negotiate a loan modification
- Negotiate a short sale
Obviously, your best bet is refinancing your current loan. Unfortunately, not everyone with a toxic mortgage can do so. They usually have some type of special circumstances surrounding their loan. Most commonly, the house is not worth enough. Depending on the type of house you need to refinance and the type of ownership (owner or non-owner occupied), you might need quite a bit of equity to refinance. The only situations where you could get out of an upside down mortgage is with the FHA or VA streamline programs. These loans do not require a new appraisal. They use the original value of the home. This means if you are upside down, you can still refinance. However, you have to have an FHA or VA loan originally in order to use these programs.
The worst decision you could make is walking away from your home. You may feel tempted, especially when you see your mortgage statements and your principal balance doesn’t budge, but this hurts your future the worst. Many people are too ashamed to walk away as it is a sign of giving up. As Americans, we try to do our best to honor our debts. Unfortunately, for many people, though, this was their only option.
You have several options if you want to modify your loan program. The government continues to offer HARP until the new Fannie Mae and Freddie Mac refinance programs are available. Right now, it looks like they will not come out until at least October of this year. This means you have more flexibility to negotiate a loan modification with your lender. The new refinance options promise the ability for people in a toxic mortgage to easily refinance, though.
Lastly, you could negotiate a short sale with your lender. This is when you arrange a specific sales price with the lender. They agree to accept this as full payment of your mortgage, even though it doesn’t satisfy the full amount. You agree to leave the home within the designated time frame. This option is not always the most pleasant as it is a long, grueling, process, but it can prevent the need for a foreclosure.
The Benefits of Refinancing
Obviously, your best option among those available is a refinance. You get the best of both worlds – you keep your home and you get more favorable terms. Make sure when you refinance, though, that you pay close attention to the terms. How much money will you save on interest? Will the interest rate adjust? What other terms do you need to be aware of so that you know the full implications of the new loan program? Refinancing might be the most favorable option, but remember, it still leaves you with large mortgage payments. Think long and hard before refinancing to make sure this is the most affordable option for you.
The Consequences of Walking Away
Walking away from your home is probably the hardest decision among the available choices. Many people are left with no choice. They have no equity and cannot afford their payments. Without the ability to refinance or even negotiate a loan modification, they have to walk away. Before you make this decision, understand the ramifications of doing so:
- Your credit score will suffer
- Most lenders will not consider you for a new mortgage for several years
- Other creditors including insurance companies and landlords may not look favorably upon you
- Your mortgage company may come after you for the money they could not recoup
Before you consider just walking away, you should talk to an attorney to make sure it is the right choice for your situation.
The Benefits of a Loan Modification
Hundreds of thousands of Americans are eligible for the loan modification program. Unfortunately, a large fraction has not used this benefit. The loan modification offers a plausible solution to make your loan more affordable. Lenders have many tools they can use to make this happen. A few examples include:
- Lower your interest rate to as low as 2%
- Write off a portion of your principal balance
- Extend the term to make your payments more affordable
Every lender offers different options for a loan modification. If you are current on your payments but are unable to refinance due to a loss in value on your home, consider your loan modification options. They allow you to keep your home and still make your payments without sacrifice or struggle.
How a Short Sale Can Help
Banks look more favorably upon short sales than foreclosures. A foreclosure requires the lender to secure legal aid to repossess your home. In essence, they have to force you out of the home. In a short sale, you voluntarily leave the home. Before you do so, though, you agree to live in the home and take care of it. During this time, you put the home on the market and try to sell it for the agreed upon price with the lender. The lender usually provides a decent time frame to sell your home. If you cannot sell it, they will work with you on a voluntary foreclosure, which is less costly for the lender and less detrimental to your future.
A Toxic Mortgage is Hard to Kick
No matter the reason you are in a toxic mortgage, it is hard to handle. Make sure you look at all of your options before making a hasty decision. The last thing you should consider is just walking away. This can leave you in financial and legal despair. Always stay in contact with your lender and discuss your options with an attorney before making any decisions.
Getting rid of a toxic mortgage is possible. You just have to have patience and use the resources available to you!
