This article is written by Peters and Associates.
Question: I took out a 10-year, interest-only mortgage to purchase a new home in 2006, and now it’s adjusting. I’ve never missed a payment, but the payment is about to go up from $550 to almost $1,400 per month. I’m underemployed, I can’t afford the new payment and I’m also underwater, so I can’t seem to qualify for refinancing. Is there anything I can do?
Answer: Yes! And you should know, you’re not alone.
2006 and 2007 were the height of the real estate bubble in Southern Nevada. Immediately before that bubble burst, people were buying homes as fast as they could and financing options were cheap and plentiful. Unfortunately, most of the homes that were purchased during the peak years are underwater, many by tens — or hundreds — of thousands of dollars.
In addition, many people are working for lower wages than during the market peak, and some are still underemployed or unemployed. This brings a dilemma: People who have done everything they can to pay their bills on time, make ends meet and cut spending — hoping that the economy would recover before the 10-year mortgages reset — now feel trapped because it hasn’t recovered. Fortunately, there are some options that can help.
Options to dispose of the home
• Traditional sale: If your refinancing and loan-modification attempts are unsuccessful but you have equity in the home, you can contact a real estate agent to sell the property.
• Short sale: When the home is underwater and the mortgage payment is unaffordable, or you simply have a desire to move, it may be possible to execute a short sale in which the balance of the loan(s) is forgiven. The seller also may receive a “cash for keys” payout. This payout can be up to $33,000, but not all homeowners are eligible for it. If you’re considering a short sale, you should contact an attorney.
Options to keep the home
• Refinance: If your credit is excellent and your house is worth more than you owe (i.e., you have equity), you may be able to refinance the mortgage to a lower, fixed payment.
• Home Affordable Refinance Program: If your credit is excellent, your loan is through Fannie Mae or Freddie Mac, and your home is also underwater, a HARP refinance may lower your interest rate or convert your loan from an adjustable to a fixed--rate payment.
• Loan modification: If your newly adjusted mortgage payment is unaffordable, a modification may reduce your interest rate and forgive some of your principal balance, thereby lowering your payment. Modifications can work for first and second mortgages, as well as equity lines of credit.
• Second mortgage settlement/stripping: If your home is worth less than your first mortgage’s principal balance, you may be able to eliminate your second mortgage with a negotiated settlement. A settlement is where you pay the second mortgage company a small percentage of what you owe to remove the debt and the lien from your property. Underwater second mortgages also can be removed in a Chapter 13 bankruptcy via a process called “lien stripping.”
Options if you're undecided
• All--In--One Program: If you’re unsure about keeping the home and want to press the bank for its best offers to modify the loan before considering a short sale, it may be prudent to consider an “All--In--One” (AIO) Program. In an AIO program, your attorney will press the bank to correct your mortgage via multiple modification paths (some published, some proprietary). If all modification options (including homeowner mediation) are exhausted or the homeowner doesn’t agree to the terms, the program converts into a short sale with the goal of eliminating the deficiency balances and getting the homeowner cash for keys.
Important to note, the government-sponsored programs — Home Affordable Refinance Program (HARP), Home Affordable Foreclosure Alternatives (HAFA) and Home Affordable Modification Program (HAMP) — are set to expire at the end of this year. The process for these programs can take months. If you’ve been sitting on the sidelines waiting, time is running out and you should seek legal help immediately.
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Please note: The information in this column is intended for general purposes only and is not to be considered legal or professional advice of any kind. You should seek advice that is specific to your problem before taking or refraining from any action and should not rely on the information in this column.
