Q: I am a 78 year old retired surgeon. I took a mortgage in 2002. A stroke in 2000 retired me from practice and I had to move into a handicap-friendly home.
My financial advisor at the time advised me to get a big mortgage because interest rates were so low. So, the mortgage was for around $500,000 at a little above 6 percent and the lending bank didn’t think twice about giving it to me.
I have been paying $5,000 per month for my mortgage, taxes and insurance for the past 9 years. I’ve never been late or missed a payment.
I’m trying to refinance my mortgage at the current lower rate to lower my monthly payment and give me a little bit of a financial break. But, the lenders I’ve talked to are shutting the door in my face.
Why? No visible income. In other words, I can pay $5,000 per month but they don’t think I can pay less. After 9 years of paying $60,000 per year I still owe close to the original $500,000.
I am scared and puzzled. Are the banks there to help or are they trying to force me into bankruptcy and repossess the property? What should I do?
A: Unfortunately, current market conditions are working against you. Let’s see if I can clear things up a bit, and give you some direction.
One problem you’re having is that your mortgage is a jumbo (just about any loan over $417,000 is considered to be a jumbo, but depending on where you live, in some high priced real estate markets the jumbo amount can be higher) and the market for jumbo mortgages is very limited. Do you have any cash you could use to lower the amount you need to a conventional loan at $417,000? You could then, providing that your home appraises in value, get a loan for a lower interest rate, and perhaps even an FHA loan.
As far as income goes, your social security, pension, 401k income, and other streams of income should count.
I’m a little concerned about your mortgage, however. After 9 years, you should have paid down a significant amount of your loan. I ran an amortization schedule at eloan.com for a $500,000 loan at 6 percent. (You can go to www.ELoan.com and click on the link to the mortgage calculator in the Tools section to see the amortization schedule for your loan.)
The monthly mortgage payment on a traditional 30-year $500,000 loan at 6 percent is about $2,997.75. The balance of what you pay per month of the $5,000 payment likely goes towards your taxes and insurance payments on the home.
It’s possible that the loan you originally got was an interest only loan for the first several years. That would mean that for those years, you only paid interest on your loan and your loan balance never decreased.
At some point the loan might have converted to a more traditional loan in which your payments included both principal payments and interest payments. If this explanation sounds familiar to you, that would explain why your loan balance is still close to the amount of your original loan nine years later.
As a surgeon that could afford a $500,000 loan, you might have saved a significant amount of money over the years and have an estate plan. You used a financial advisor when you took out the loan, and this would be a good time to reevaluate your finances and your financial plan.
It’s clear from your question that you are having trouble affording your monthly payments. You might want to reevaluate how you have your money invested with your financial advisor.
If your cash is bringing you a return of 6 percent or higher, you may want to keep things the way they are. If your money is not earning much these days, then you might want to consider paying down your 6 percent home loan to get a smaller loan with a lower interest rate to reduce your monthly outlay.
If you’re able to refinance for an amount below $417,000, you might want to consider getting a 15-year loan at 4.5 percent, on which you’d pay $3,190.02 per month. An added benefit would be that you would pay off your loan 6 years ahead of the date on your current loan.
However, if you simply want to lower your payments, you could go with a 30-year amortization loan at around 5 percent, and pay only $2,238.55 per month, saving $700 or more per month when compared to what you might have been paying on your current loan. Just remember, you’re adding another nine years to the life of the loan.
Again, you need a savvy financial advisor, accountant, attorney, family member or other person you trust who can help you figure out the term of your current loan and where you should go from here.
One last bit of advice, you can always sit down and talk to a mortgage loan officer at a local bank near you and talk over these issues. You shouldn’t have to pay or sign anything to walk through the situation.
Get as much information as possible and then make the best financial decision you can taking into account your financial situation, your age, your monthly income and your financial goals.
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