Q: We purchased a home in 2006 for $582,000. We put down $130,000 and financed $452,000 with a 5-year interest-only loan as we only planned to be here for four years.
Our home is now worth only about $400,000 and we’ve made small payments to the principal so our mortgage is about $449,000. Our mortgage interest rate is set to adjust in June, 2011.
In addition to our first mortgage, we also have a $9,500 home equity loan that we will pay off in May, 2011.
My husband is in military, and it looks like he’s going to get orders to move in this summer. Rather than sell the house and lose money we will rent it. But homes in our neighborhood rent for about $500 less per month than our current mortgage payment.
We’re worried when the interest rate adjusts on our mortgage, the payment will be more than we can pay, once you factor in housing costs in our new location (likely overseas), rental property management fees, and the $500 per month loss.
We’d like to refinance before we move, so the mortgage will be on our primary residence, not a rental property, as the rates are lower. But of course, we are way upside down on the loan.
Will any bank even touch us? We haven’t missed a payment, have been paying extra principal, don’t have any other debt except a car payment, and have excellent credit scores (both of us are over 760).
What are our options, if any?
A: You’re in a tough spot, although you’re better off than many simply because of the enormous amount of cash you put down on your home.
In evaluating what to do, you might consider a Home Affordable Refinance Plan under the Obama Making Home Affordable program. If you qualify, you can have your lender refinance your loan. If you are current on your loan, live in the home and it’s a one-to-four family building, and your loan is serviced by Fannie Mae or Freddie Mac, you might have a chance at refinancing the loan through the program.
You can get more information about the Home Affordable Refinance program by going to MakingHomeAffordable.gov.
If you are unable to refinance your loan through the program, you’ll have a tough time refinancing. Why? You owe $449,000 plus the $9,500 home equity loan, for a total of $458,500. That is above $417,000, which is the amount of financing covered by Fannie Mae, Freddie Mac, and FHA. Loan limits may be higher in certain high cost areas. If you live in a designated high cost area like San Francisco and Boston, you may fall within the allowable loan limits for institutions. Those three institutions account for about 90 percent of the loans being done these days.
If you’re in jumbo loan territory at that amount, you’d need to find a lender willing to give you two loans: One for $417,000 and a second loan for the remainder that you owe.
But here’s the rub: To get that much money, with most lenders you’d need to have 25 to 30 percent in equity in your home. Right now, you’re about 25 percent underwater with your mortgage. Your home is worth substantially less than what you owe. I don’t think any lender will touch you at the moment, although you should call some local, reputable lenders and have a conversation about your situation.
There are very few 100 percent loans available, although the VA offers one as does USDA.
But I believe the VA tops out at $417,000, and your home is worth even less than that, let alone how much you owe above that. To get a VA loan, you’d have to come to the table with almost $60,000 in cash to make up the difference between what you owe and what your property is worth. Your $130,000 cash down payment, a substantial number, has vanished.
For a USDA loan, your home has to be located in a qualifying area. Big cities and most suburban areas are out as these are rural development loans.
If you can’t refinance, then you have to look at renting your property. It’s clear that you’re going to lose money. But if you can swing a $500 per month loss for the next few years, you might find that properties values will rise a bit.
What you’re looking at is a $6,000 per year gamble. Normally, I’d tell someone to take the loss and move on with their life. But your house is so expensive, and you have so much at stake, and relatively speaking, you’re not losing that much money, so it’s a gamble probably worth serious consideration.
What you have to hope is that when interest rates adjust, yours may adjust lower next year and thereafter increases may be capped by 1 to 2 percent per year, which will help keep things slightly more affordable. Take a look at your mortgage documents to see where you might end up if interest rates stay where they are today or go up a point or two.
Like so many others, you’re in between a rock and a hard place. Another option is to find a way to bring in more income. I don’t know how realistic that option is for your family, especially if you’re going overseas, but this option should be part of your conversation.
I know I’ll receive letters from readers asking whether President Obama’s newly revised mortgage modification program will help borrowers like these. The new programs are supposed to encourage lenders to write down the principal of a loan to the current loan value. FHA is supposed to step in and write new mortgages, even if there is no equity in the property. And, borrowers who lose their jobs are supposed to qualify for forbearance of up to 6 months, allowing them to skip mortgage payments while looking for a new job.
It’s possible that these borrowers would qualify under the new rules, but it will take months for the new programs to get up and running.
In the meantime, if you’re underwater and don’t want to walk away from your mortgage, you might call the HOPE for Homeowners hotline at 888-995-HOPE and speak to a HUD-certified housing counselor.
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