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Walking Away From Your Mortgage

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Is it okay to walk away from a mortgage?

Whether or not it’s “okay” to walk away from your mortgage is a question only you can answer – and every situation is unique so don’t expect another’s answer to be your answer.

To help you reach a decision let’s consider the following:

  • How far underwater are you?
  • Do you have recent financial hardship?
  • Have you considered and tried alternatives to walking away… like refinancing your mortgage or a short sale of your property?
  • If you wait it out, will you ever reclaim enough value to cover the mortgage?
  • Do you have personal or religious beliefs that keep you from walking away?

Let’s take a closer look…

Are you in financial hardship?

If you or your spouse have recently lost a job, you may be able to claim hardship.  Most lenders have loss mitigation departments dedicated to helping people in your situation.  Call them and try to work out a solution.

If you don’t have financial hardship then simply walking away from your property probably isn’t an option.

Have you tried refinancing your mortgage?

If you are in financial hardship, you need to strongly consider refinancing your mortgage.  Lenders are willing to work with borrows in ways they never would have a few years back.  Why?  Because they don’t want you to walk away from your mortgage… you’re their livelihood.

If your current lender won’t work with you… one company offering free mortgage quotes right now is CapWest Mortgage.  Since the quote is free it’s a good way to find out if they can work with you to find a solution.  You never know till you try.

Have you tried a short sale?

If you cannot afford your home, and have discerned that refinancing will not work for your situation, you can consider a short sale.

Pertaining to real estate, a short sale is nothing more than a sale of your property for less than the amount of your loan(s).

As mentioned above, contact your lender and ask to speak with the loss mitigation department.  They will evaluate the potential of a short sale transaction on your property based on their own pre-determined criteria.  In light of the overwhelming amount of loss they’ve suffered from mortgage failures in the last several years they’re often open to offers outside of their existing criteria as well.  Put another way, lenders are more willing than ever to accept short sales.

If you’re under-water and unable to cover your mortgage with a sale, a short sale delivers an opportunity to avoid foreclosure.

Will your property reclaim value?

Since we cannot foretell the future let’s contemplate other relevant points.

Find extra work – If you love your home and could make your payments by finding extra work… go find more work.  Our generation is certainly not the first to come upon hard times.  You could deliver pizzas, wait tables, write online, or even start your own business.  If you want to stay in your home then be sure you work hard and give it your best shot before walking away.

Rent out your home – Could you rent out your property and find less expensive housing for yourself?  There are currently many people looking to rent homes rather than buy.  Try placing an ad on Craigslist to find renters.  If you can’t charge enough to cover the entire cost of mortgage, insurance, and taxes… figure out how much less you could charge while still helping to make your payment and reach your goal.

Rent out a room –  Rather than renting out your entire home, perhaps you have 1 or more rooms you could rent out.  This would allow you to stay in your home while helping you meet the payments.  Another benefit to this is the fact that you still reside in the home and can keep a better eye on your tenant.

Does walking away conflict with your beliefs?

A final point to consider is whether or not walking away goes against your personal beliefs.  If it does, then be sure to give the alternatives your best effort.  If you do everything in your power to make your payments but are still unable to do so, at least you didn’t compromise your morals.  Only you know if you’ve done your best.

I was inspired to write this article after seeing this infographic on creditloan.com detailing the statistics of those walking way from mortgages.

Debt Plan – Facing Bankruptcy & Foreclosure

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Have a question of your own?  Ask Matt Jabs for free!  🙂

Should Julianna let her homes go into foreclosure?

DFA Reader Julianna asked:

We are guilt-ridden and full of shame that we have allowed ourselves to get caught up in this lethal debt trap.  Unwise use of credit cards when income diminished due to income drop.  This month we had $1900 income with $7K in debt payments:

$300K unsecured debt, 2 mortgages (one rented) while waiting to sell, 2 auto loans $5K remaining on one and $20K on the other; $24K student loans.  Income drastically reduced due to medical crisis for me; husband employed in real estate, 100% commission based.  RE market is dreadful here.

Against our better judgment, met with bankruptcy attorney and were advised we make too much money to file.  He said only way is to let both homes get foreclosed, give up one vehicle, and find a rental house $700/mo (IRS allowable guideline) As strong Christians, we do not believe bankruptcy is the way.  We want to pay our debts, and have now contacted Consumer Credit.  The repayment plan would reduce interest rates and lock fees, but we aren’t certain if we can meet the minimum payments.  I’m scared of being homeless!  I’ve been reading everything I can — and realize we need an emergency fund right away — but with what?  We are in survival mode.  Please pray for us and give any advice God lays on your heart.  Thank you in advance.  God bless.

Debt and shame

This is an extraordinarily difficult situation, but there is hope.  Release your feelings of guilt and shame.  They will not help you; a firm commitment to paying back what you borrowed will.  That being said, the task ahead of you is neither small nor easy.  You will need to live far below your means in payment for living above.  The process will be all the harder if well intentioned people foolishly say you “deserve to live a little.”  Ignore them, and continue to do what you know is right… and you can do this.

Although this situation is difficult, the way out is no secret.  The principles of sound financial management are the same no matter what amount you are working with:

  • Spend less than you earn and save the surplus.

Here is my recommendation for how to deal with your situation.

Create a Written Budget

This MUST be your first step, your budget is your map.  Without a written budget, it is impossible to know what you have or where you are going.  This is especially crucial because of the variable nature of your husband’s income.  To calculate your monthly income, use his net income from last year (be conservative) and divide by 12.  Never spend more than that in a month, even when you have more.  When creating your budget, follow this simple rule:

  • Give 10% – Save 10% – Live on 80%

Realize that somewhere out there a family is living off 80% of your income.  It is important, as a Christian, that you not neglect your giving when in financial difficulty.  The 10% you save will be used to start building a $1,000 emergency fund (a larger cash reserve only makes your creditors more likely to sue for payment.)  With every check that comes in, before you do anything else, write a check for 10% for giving, and place 10% into a savings account.  When setting up the rest of your budget, eliminate every monthly bill you can: cable, magazines, cell plans etc.  Small bills add up.  Assess the difference between wants and needs and get down to the basics of food, transportation for employment, and shelter.  The excess will go towards freedom from debt.

Debt Reduction

Once your budget is in place, you need to eliminate all the debt you can.  First step is to cut up all the cards.  This prevents you from going deeper into debt slavery.  Next, eliminate as many debts as possible.  Return anything you still can that was bought with credit.  Those that you cannot return try to sell for enough to pay it off.  Try Craig’sList, a garage sale, and friends/church/family.  Finally, do not limit yourself to things you still owe on.  Anything of value you can do without should be sold.  Your goal is to reduce the amount of debt you will have to pay off with earned income.

Downsize Your Vehicles

The car you still owe $20,000 on needs to go.  Try to sell it for enough to eliminate the debt, and adjust your lifestyle to having one vehicle.  The one you owe $5,000 on is another matter.  If you can sell it for enough to cover the debt, you should, but you may already owe twice as much as it is still worth.  If this is the case, make paying off the vehicle your priority.  If your husband’s job allows, consider going car-less for some time and using bicycles or public transportation.

Evaluate Your Housing Situation

You say you have one house rented pending sale.  I hope that it will sell soon.  Add up the total ownership cost of your current home (mortgage, PMI, insurance, utilities, maintenance, etc.).  If the total is more than 35% of your husband’s net income, or more than 40% of gross, the house is more than can be afforded.  Place the home on the market, and begin the search for an apartment that meets the above guidelines.  It may be smaller, but you will feel better knowing that all the bills can be paid.

Final Details

Remember when paying your bills to take care of the important stuff first.  Give, save, pay for your housing, buy food, and spend the money needed to keep your husband working.  Do not spend the money for these things on unsecured debts.  If you are late paying an unsecured debt, the worst-case scenario is a line on your credit report.  That is ok as long as you have a place to live.  Meet your needs, and as you are able, begin paying on the highest interest debt first.  If a consumer credit agency can work out a payment plan, that is a good option.  Stay focused, stay the course, and one day sooner than you think, you can be debt-free without having to go through bankruptcy.

Do you have any advice for Julianna?

Have something to add?  Please share your wisdom and experience and help point Julianna in the right direction.  Thanks!

Have a question of your own?  Ask Matt Jabs for free!  :)

*Disclaimer*
We accept no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this material. Our comments are an expression of opinion. While we believe our statements to be true, they always depend on the reliability of our own credible sources. Any advice taken from this site does not in any way establish a client/adviser relationship.  We always recommend that you consult with a licensed, qualified professional before making any financial or investment decisions.

Refinance Home Loans – How One Call Saved Us $41,123.16

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I refinanced our first mortgage

It all started when someone on Twitter mentioned the possibility of refinancing home mortgages using the making home affordable program.  I had always assumed because we are upside on our home that it wasn’t possible… well I was wrong.  From start to finish I was able to successfully refinance our 1st home mortgage with little more than a few hours of research and a simple phone call.

This article summarizes the simple steps I took and aims to outline a mortgage refinance strategy you can use.

Our first and second mortgages

To give you an idea of where we are in comparison to where you are, here is our mortgage and home value information.

  • 1st mortgage = $119,000 at 5.875% interest rate
  • 2nd mortgage = $39,700 at 8.8% interest rate
  • Total owed = $158,700
  • Total borrowed = $165,000 three years ago
  • Appraised value at purchase = $175,000
  • Appraised value at present = $120,000 (according to our 1st mortgage lender)

As you can see, according to the present value of our home, we are upside down by nearly $40,000!  The good news is that our first mortgage lender sees the value of our home as enough to repay the amount we owe them.  Therefore our 2nd mortgage lender has much more risk than our 1st mortgage lender.

Refinance the 1st or 2nd mortgage?

Although refinancing our 2nd mortgage was most attractive to me (because of the higher rate,) I knew our lack of equity would make this option impossible… so I didn’t even try.  Why impossible?  Our home is currently valued at just enough to cover the 1st mortgage.  In the event that we could no longer make our mortgage payments, our 2nd mortgage lender would not be able to recoup any of their investment.  This essentially makes our 2nd mortgage an unsecured loan that cannot be refinanced because no lender in their right mind would touch it.  Even if a lender would, they could not offer us a rate lower than our current 8.8%, so we were better off focusing on refinancing our 1st mortgage.

How did refinancing benefit our home loan?

I’m glad you asked… this if my favorite part to talk about!  Here are the ways refinancing benefited our 1st mortgage situation:

  1. Shorter term – We refinanced from a 30 year fixed (with 27 years remaining) into a 20 year fixed.
  2. Lower interest rate – Our rate before refinancing was 5.875% and our new rate is 5.5%
  3. Zero closing costs, zero points, zero fees – It did not cost us a penny to refinance.  I explored other options with our lender that offered better rates with closing costs, but the option we chose was best for our situation.
  4. Greater principal reduction – Before refinancing we were only reducing mortgage principal by $150 each month.  After refinancing we will be putting $275 toward principal each month which will greatly reduce the interest we pay over the life of the loan.
  5. Interest savings of $41,123.16 – By refinancing into a shorter term and increasing our monthly principal paid we have set ourselves up for massive savings in interest paid over the life of the mortgage.  For those interested, check out our amortization schedules before refinancing and then after refinancing.
  6. Minimal monthly payment increase – Even though refinancing will save us more than $41,000 our monthly mortgage payments only increased by $92, which is a virtually unnoticeable change in our budget.

My wife and I are crazy excited about how much our refinance is saving us… and REALLY want to help you move yourself in the same direction.  It is much easier than you might think, here are the simple steps we took that resulted in such an enormous savings.

CapWest Mortgage refinancing

Right now CapWest Mortgage has excellent deals on refinancing… I highly recommend you check them out.

Simple Steps to Refinance Mortgages

Step 1:  Does Fannie Mae or Freddie Mac own your loan?

Only loans owned or guaranteed by Fannie Mae or Freddie Mac are eligible for refinancing according to the Making Home Affordable government program.

Use these resources to decipher if Frannie Mae or Freddie Mac own your loan… or you can call and ask your current mortgage lender.

Fannie Mae

Freddie Mac

If either Fannie or Freddie own  your loan then your current mortgage lender most likely has a program set up related to the Making Home Affordable government program.  Make sure you mention this program when you call your lender.

Step 2:  Gather your mortgage information

Here is a list of the information you’ll want to collect before calling your bank:

  • Information about your mortgage, such as your monthly mortgage statements
  • Information about the monthly gross (before tax) income of your household, including recent pay stubs if you receive them or documentation of income you receive from other sources.
  • Your most recent income tax return.
  • Information about any second mortgage or home equity line of credit on the house.
  • Account balances and minimum monthly payments due on all of your credit cards.
  • Account balances and monthly payments on all of your other debts such as student loans and car loans

Step 3:  Make the call to the mortgage lender

This is the most critical step because this is where you will make or break your deal.  You can secure a “good” refinance, or you can secure a “better” refinance… it is all up to how you handle this call.

Use these tips when talking to the mortgage lender agent:

Call your existing lender first

By all accounts, you should start with your current lender first because they will be able to give you the best bang for your buck.  To find the contact information for your lender, look on your mortgage statement.

I actually called Capital One first because I would have preferred to move my 1st mortgage to them.  The Capital One 360 rep told me they could only offer me a refinance if I had at least 25% equity in the home, and suggested I contact my current lender… which I did.

Your lenders phone menu will probably have an option for refinancing under the Making Home Affordable program so just follow the prompts.  If they do not then just keep going through the menu until you get a rep on the line.

Do not settle for their first few refinance offers

Know what type of refinance will satisfy you before you call.

You have to remember that the better deal your mortgage lender gives you on a refinance, the more they stand to lose in interest income over the life of the mortgage.  Because of this they will offer you the least attractive options first to try and appease you without giving you the best deal.  Don’t fall for this trick.  Keep chipping away at their offers until you get something that makes sense.

Befriend the mortgage rep

You catch more flies with honey than with vinegar.  Period.  When you talk with the rep make sure you separate the agent from the lending company itself by never referring to them as one in the same.  If you separate them from the company, it is MUCH easier to get them on your side.  Once you have them on your side they will be much more willing to help you find a solution most beneficial to you.

Be willing to walk away

Depending on the lender and the rep you talk to, you may have to be prepared to walk away.  Many times they will not offer you the best deal until you are ready to hang up.  While offering you a decent refinance can hurt their bottom line, having you refinance with a different lender would hurt them even more… and they know this.

Step 4:  Follow through with the paper work

Once you secure the deal with the mortgage lender agent the process is mostly over.  Now you just have to wait for the paper work to get to you.  Keep in mind that they may make the process a little more difficult than necessary… this is possibly another effort to keep you in your current mortgage that will pay them more interest.  Do not become frustrated, just wait patiently and take care of the paper work as it comes.

If you start to loose motivation or you become angry and annoyed with the process, just focus on the amount of money this paper work will save you in the end!

In my case, I was able to save over $41,000 by doing just a few hours of leg work.  I don’t know about you, but I can convince myself to jump through a lot of hoops and maneuver through a lot of red tape for $41,000!

Leave us a comment with your mortgage refinance story

Your story will help others just as mine helped you so be sure to let us know how your experience went by leaving a comment.  Was it easy?  Was it hard?  Do you have any tips for others that I may have glossed over?  Let us know, and Godspeed on your mortgage refinancing efforts!