I recently had someone ask my advice concerning what to do in their situation; that of having a home that is ‘upside down’ (meaning the home is worth less than what is owed on it).
They have a 4.875% loan and want to re-finance the loan in order to reduce the monthly payment. SO, below are a few of the things we discussed, a few of the pertinent aspects to consider:
1) Refinance the loan – how much will refinancing the loan help? With today’s interest rates it would be possible to refinance to approximately 3% annual rate. IF a loan was approved it would save approximately $200/month.
- HOWEVER, a key consideration – closing costs. They indicated to me that she had estimates that ranged from $1900 to $2400. This implies that it will take at least 2 years before the loan begins to provide savings.
- One key problem – the house is ‘upside down’ – only under certain conditions will the lender provide a loan since the appraised value of the home is lower than what is owed. There are currently several government sponsored programs that support lenders in making loans for special situations. The following are a few programs available, see http://www.makinghomeaffordable.gov/programs/Pages/default.aspx:
i. HARP – Home Affordable Refinance Program (allows for persons to refinance their home to a more affordable interest rate, even if the value is upside down, however must be an FHA loan and with loan-to-value greater than 80%. Select the link to view all criteria.)
ii. HAMP – Home Affordable Modification Program (allows for persons to refinance their home even if it is not their primary residence. Select the link to view all criteria.)
iii. PRA – Principle Reduction Alternative (allows for persons to use this process to ‘encourage’ their lender to reduce their mortgage. Select the link to view all criteria.)
- There’s a tool available that steps through simple questions that can help one determine eligibility and if these programs can help – http://www.makinghomeaffordable.gov/get-started/finding-the-right-program/Pages/default.aspx
- There are several other programs available – http://www.makinghomeaffordable.gov/get-started/finding-the-right-program/Pages/default.aspx
2) Short sale – there is the possibility to approach the lender about a short sale agreement, but at least three factors are required. The individual must be behind on their payments, the home must be ‘upside down’ and the borrower must prove financial hardship. The lender must approve this type of loan and the borrower will not be able to remain in the house. (There are many factors that must be considered.)
3) Purchase – with this particular situation there were multiple homes in the same area [not in Texas] that were greatly reduced in value prior to the housing crisis. For someone with means this could be the opportune time to mitigate losses by purchasing additional property. This is a long-term strategy, however the likelihood of a real estate recovery is believed by many to be just around the corner. In fact in Texas we have seen home values begin to turn around. Additionally with interest rates still low this could be the best way to ‘turn lemons into lemonade’.
I would be honored to help you with your real estate needs and happy to explain tax benefits and other aspects related to financing a home or investment property. Just give me a call or contact me.