6 Strategies for Dealing with an Underwater Mortgage
Stay and pay? Refinance? The pros and cons of several options
A report released last month by
1. Stay and pay.
People feel attached to their homes, so Detweiler says their first impulse is often to stay put and keep sending in mortgage checks, even if it doesn't make financial sense in the long run. "Is it realistic for you for awhile?" she asks. "Not just the next few months, but can you afford to stay and pay for the next several years? You may still be underwater at that point." Maintenance fees are another consideration. For instance, if you know you'll need a new roof or the heating system is on its way out, those repairs can add up. Of course, if the value of your home has declined, you may be able to get it reassessed and pay lower property taxes.
A traditional refinance may not be an option for homeowners with negative equity. But those with loans owned by
3. Loan modification.
In a loan modification, the lender agrees to lower the interest rate and payment, either temporarily or permanently. If your mortgage payment is more than 31 percent of your monthly pre-tax income and you have suffered a financial hardship, you may qualify for a loan modification under the Home Affordable Modification Program (HAMP). Some lenders have their own loan modification programs as well. Trouble is, the process can be extremely time-intensive. And very few loan modifications actually reduce the principle, so you're still in negative equity -- you've just lowered your monthly payments. "Until you're at positive equity, you're stuck with that house," says Detweiler, pointing out that if there is a reduction in principle, you might have to pay taxes on that amount. Depending on how the modification is reported by the lender, it could also impact your credit score. She suggests consulting a HUD-approved credit agency to discuss your options.
4. Short sale.
If your lender agrees to a short sale, you're allowed to sell your house for less than you owe on the mortgage. "One couple I interviewed got like
5. Foreclosure or walking away.
"Walking away from your mortgage is essentially the same as foreclosure," says Detweiler. "It's one of the most serious items on your credit report, in the same category with bankruptcy and repossessions." But the impact on your credit score shouldn't be the only consideration, adds Detweiler. "Focus on 'how am I gonna come out of this financially?'" If you do decide to walk away, your biggest challenge could be getting the bank to take back the house. "The bank doesn't actually foreclose on that so you're still legally responsible," says Detweiler. "The city may bill for trash pickup, you could be on the hook for insurance issues that arise." She suggests staying on the property as long as possible to make sure it's properly maintained leading up to the foreclosure.
Filing for bankruptcy won't erase mortgage debt. "What you're doing in a bankruptcy is you're trying to give yourself a reprieve," explains Detweiler. Eliminating other debts could free up money to cover your mortgage, and a Chapter 13 bankruptcy could allow you to catch up on payments for five years without interest. But it doesn't allow you to stop paying the mortgage altogether. "In some areas of the country, you are able to wipe out a second loan that has become unsecured because the value of your property has dropped," says Detweiler. "Unfortunately, our current bankruptcy codes let borrowers negotiate any kind of debt but mortgages."
Whether you're planning to stay and pay or you're considering bankruptcy, Detweiler stresses that it's a good idea to consult an attorney early on. "Don't make that your last resort," she says. "Specifically, a bankruptcy attorney could help you decide if you can afford to stay in your home."
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Real Estate - 6 Strategies for Dealing with an Underwater Mortgage
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