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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.

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!

Is It Better to Buy or Rent?

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Over the last few weeks we have had some good discussions regarding the buy vs. rent debate.  Robert gave us a few solid articles and many of you chimed in with great thought provoking comments.

But who is right? Does the fact that 30 year mortgages double home prices really make renting a better option than buying?

Is It Better to Buy or Rent?

The question is anything but simple, so it’s only logical to assume we’ll wind up with guys-n-dolls going to bat for both teams.

What are others saying? Thanks to help from a couple dinosaur comics and several atrocious years in the housing market, Get Rich Slowly founder JD had a change of heart on the matter.  In his own words,

“One of my beliefs that’s been set on its head is that Americans are better off buying their own homes. I don’t believe that’s necessarily the case anymore.”

A few years back he felt home ownership was always the way of the dragon but now perceives the best reasons to buy are actually non-financial and/or personal, since the numbers often favor renting.  I agree.

If you’re interested in reading more of JD’s take on this topic and many others be sure to grab a copy of his soon to be released book, Your Money:  The Missing Manual.

Aside from JD’s point of view I also checked out several other takes on this topic.  The wise consensus seems to be… neither option is best for everyone.  I agree.

Buy or rent – crunching the numbers…

We’ll start by shooting a hole in the argument that “homes appreciate over the long term.”  The truth of the matter is that home prices over the last 80+ years beat the inflation rate by a mere one percent.  Sheesh, I get better rates in my Capital One 360 Savings account.

Laying aside emotional factors, let’s see if we can help you determine which option is best for your unique situation according to the numbers. After all… numbers don’t lie right?

This is where the bottomless pockets of big companies come in handy.  They pay really smart programmers to dev really cool calculators that make really complicated formulas look really sexy.  Check it out…

Is It Better to Buy or Rent Calculator

I used this awesome WSJ calculator to discover if it would be better for us to rent or buy (for the record, we bought nearly 3 years ago.)  Here are the details of my calculation, complete with a screenshot:

  • Monthly rent = $800 – this would be the maximum amount we would ever spend on an apartment in Lansing, MI.
  • Home price = $165,000 – this was the cost of our home.
  • Down payment = $0 – yeah I know… real smart eh?  😉
  • Mortgage rate = 6% – the combination of our 1st and 2nd mortgage rates would actually be a bit higher.
  • Annual property taxes = $3,200 – which is about 2% of the cost of our property each year.
  • Annual home appreciation = 1% – despite our currently depreciated asset, I chose to go with the long term trend here.
  • Annual rent increase = 3% – to factor in increasing yearly rent costs.

We have owned our home for only 3 years so we are still on the really expensive end of our mortgages, which made my self-audit especially hard to swallow… but I knew that going in.

Renting an $800 apartment for the last three years instead of purchasing our home would have saved my wife and I approximately $24,000.

Another factor worth mentioning, but not covered by the calculator, is the current value of our home.  We’re upside down on our home by an approximate measure of $20,000 which leaves us unable to sell until that deficit is wiped out (either by us or by the markets, but likely by us.) Adding in the cost of our depreciated asset, home ownership, over the course of the last 3 years has cost us approximately $44,000 more than renting.

*sigh* Oh well… this just stokes my motivation to soldier on in passionate debt-slayer mode!

Try placing your numbers into the calculator to audit your own housing situation.

So… is it better to buy or rent?

Does the joy of home ownership outweigh the higher cost?  Is sacrificing home ownership more than you can stand to do, or are you one of the few who have chosen sacrifice immediate wants choosing instead to rent, save up, and pay cash for your a home?

Ultimately, you are the only one who can answer that question… according to your unique situation.

If you are currently contemplating home ownership, I recommend being careful not to make partially educated decisions based mostly on emotion.  Instead, run the numbers for yourself and be sure you have a full understanding of both the short and long term financial ramifications before making your move.