Upside Down Mortgage
by Debi G. in Bonney Lake, WA
Ask Kate about your upside down mortgage: Hi Kate, We are in danger of losing our home. I've seen so much different information on the web but don't know where to begin and what legitimate options are available for us. We are currently in the 4th year of a 5 year option ARM loan and since we paid only the minimum each month we now owe $216,000 when we originally borrowed $188,000.
Debi continues... Our loan servicer is now requiring monthly payment of $1645 interest only.
I have been unemployed for over a year and getting unemployment benefits. Both my husband's income and mine have decreased over the last 14 months. We are in danger of losing our home now, because the monthly payment has increased to a hardship level and we cannot refinance due to the value dropping since 2007. The house and land are only worth approximately $155,000.
What can I do to keep our home, or should we give up and let the bank take it back?
Kate Answers: Your Upside Down Mortgage
***zz-portrait-left.shtml*** Dear Debi,
As homeowners, we understand signing loan documents means we are agreeing to pay back the full amount borrowed, regardless of our home's future value.
But at a certain point, homeowners with severely upside down mortgages and rising monthly house payments might have to say enough is enough.
Correlation Between Option Arms and Housing Boom
Ever since the Great Depression brought us FHA mortgage loans
, homeownership has been an integral part of the American Dream. During previous decades, buying a house has equaled wealth building and perhaps even getting one step closer to retirement.
But let's go back to the 1970s when the Savings and Loans were battling record-high interest rates. The solution? The Option Arm loan. Designed to be offset by rising home values and future wage increases, this negative amortization ARM had the potential to increase a mortgage balance, as you are sadly experiencing.
With low start rates, the Option ARM loan was intended to gradually ease homeowners over 5 years into their monthly house payments, eliminating the need to purchase a bigger home a few years down the road. This saved people a lot of money.
Unemployment and Plummeting House Values
Jump ahead to late 90's with home prices spinning out of control. Less-than-interest-only home mortgages (option ARM loans) were dubbed the Designer Loan. Simultaneously, big banks became greedy and started raising profit margins, which in turn increased mortgage balances and decreased homeowner equity.
After plummeting housing values and high unemployment began oozing across the nation, everyone woke up knowing someone with an Upside Down Mortgage. The question of walking away from homes dominated conversations at home and in the media.
Since a strong housing market has been part of most economic recoveries, we may be asking your question for some time to come. "What can I do to keep our home, or should we give up and let the bank take it back?"
Alternatives To Upside Down Mortgages
But before I go any further, I want to emphasize the importance of consulting legal consul and your CPA before engaging in foreclosure alternatives. That being said, let's get to your answer... Mortgage Modification:
I've written quite a bit about mortgage loan modification. This will help you understand the process - Is Mortgage Loan Modification Easy? HARP:
In response to distressed homeowners, our government initiated Making Home Affordable (MHA). One of its programs, HARP - Home Affordable Refinance Program - is intended for people with Fannie Mae or Freddie Mac mortgages. Read my answer to Melanie from Arizona who asked Is This Nationwide Lender My Only HARP Refi Option?HAMP:
Another MHA program is HAMP - Home Affordable Modification Program - intended for homeowners with mortgages other than owned by Fannie Mae or Freddie Mac. Susie from Illinois asked me for information about HAMP And The Negative Amortization Loan
. FHA Short Refinance:
FHA Short Refinance is to assist non-Fannie Mae, non-Freddie Mac, non-FHA, non-VA and non-USDA borrowers with an upside down mortgage. But do read my reservations in my answer to Chris's question about FHA Short Refinance
.Real Estate Short Sale:
Sellers with an upside down mortgage can apply to their loan servicer for permission to sell the house for less than what is owed. Jay from Florida asked me about the Short Sale Process
.Stopping Mortgage Foreclosure:
Browse through my series written just as foreclosure began to sweep the nation - How To Stop Mortgage Foreclosure
. I think you will find some helpful ideas.
Lastly, go here to find many more of my Ask Kate answers regarding Loan Modification, Home Affordable HARP, HAMP, FHA Short Refinance, Real Estate Short Sale and even Strategic Default
Debi, I wish you the best of luck. I know you have some hard choices ahead. Please don't hesitate to ask another question.
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