Q: My daughter has a $500,000 interest-only loan with a term of 40 years. After 10 years, the loan converts into a principal and interest loan and she will start paying down the balance. Her loan is 6.25 percent and the interest rate is fixed.
Of course, her house is now worth a lot less than $500,000. Maybe it’s worth $350,000. So, what is she supposed to do? She has morals and pays the $3,000 mortgage every month but is it really fair?
Why can’t something be done for her and not just for those homeowners who are not making their payments and are being foreclosed on?
She is a good person and deserves better. She has been told that the only way she can refinance is to come up with 20 percent to put down. Is this true? Thank you for your help.
A: It’s very unfortunate that your daughter bought a $500,000 house with an interest-only loan (and I’m guessing nothing down). I understand that her property seems to be worth a lot less right now, but that doesn’t mean the property won’t be worth what she paid for it down the road. I assume she didn’t buy it for a quick fix-and-flip, but to live there for the long run.
You have to take the long view when it comes to real estate, as it is a rather illiquid investment (meaning, that it isn’t as easy to sell as a share of stock in a company).
If your daughter lives in the property for the next 7 to 10 years, it will likely be worth more than what she paid for it. After property prices fell dramatically in southern California in the late 1980s, property values were fully restored by 1994, and then prices rose dramatically in value from there. If your daughter keeps making her payments and maintains the property, the value should return to the area over time.
Regarding the issue of fairness, if your daughter has enough income to qualify, and the property appraises out in value, she can get a new loan through the federal government, which is making FHA loans in high-cost areas up to $650,000. If she doesn’t have the income to qualify and if the property has really dropped so dramatically in price, then she may be out of luck – at least for now. There are virtually no lenders willing to do jumbo loans at the moment (loans over $417,000).
I’m not sure why you feel your daughter deserves a bailout. Your daughter is the one who chose this property and this loan. Surely no one held a gun to her head and made her sign on the dotted line. Like millions of other Americans who now find themselves in trouble, she thought she was making a smart move for herself and her family. She thought she was investing in her future. But by not really understanding the numbers, she finds herself in possible financial trouble.
My suggestion is that if she has the income to support her monthly mortgage payments, she should do that. She will continue to maintain her credit rating (which is hugely important these days) and with luck, one day she will own a property that is worth what she paid. If not, she should hire an attorney and consider her options.
If she has financial problems, she might consider bankruptcy, or she might list the home for sale as a short sale or work with the lender to take the property back in lieu of foreclosure. But these options are usually left for those people that are unable to pay their bills, have severe financial problems and they will inflict a damaging blow to their credit score.
Jan. 19, 2009.