My mortgage-modification strategy
A modification would help some, but it's not going to get us out of this mess.
I just sent off a wad of paper to the loan officers at the credit union. My favorite spy there tells me that because I've been laid off my job, we have a shot at getting our mortgage payments reduced, at least for a while.
I've asked to have the principal cut, since the so-called "investment" house is now worth about $50,000 or $60,000 less than my son and I owe on it. What a fiasco!
What we’re hoping for
Of course, they're not going to do that. The credit union’s loan officer says they have been cutting interest rates by re-amortizing loans over 40 years. This is a temporary arrangement, lasting at most two years. After the period is over, the customer may be given an opportunity to refinance, or simply to allow the rate to revert to what it was, with no detriment to the person’s credit rating.
Because the credit union has never been involved in federal loan programs, this is a private loan modification, not part of a government stimulus plan.
Rates are at 5.09% today, and so, since our rate is already down to 5.3%, I’m afraid this wouldn’t make much difference for us. However, if the loan were re-amortized over 40 years, then our mortgage payment would drop by $141 a month for the next year or two. That would help a little. Not much, but some.
I've also asked them to change the terms from 30/15 to a straight traditional 30-year mortgage without zinging us for refinance costs. In a 30/15 mortgage, your payments are based on amortization over 30 years, but the payment comes due in 15 years. If you haven’t sold the house by then, you have to refinance. Because we thought we would own the house for five or at most 10 years, this looked like a pretty good deal at the time.
Now, though, it's beginning to appear that the house will not regain its value in the 12 or 13 years remaining to run on the 15-year part of the present mortgage. And if history repeats itself, in another decade you can be sure that interest rates will be through the roof. Even if we have paid down the principal some, we could end up with payments that are no less than what we're paying now, which is WAY too much.
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If the property value has not risen significantly by the time the initial 15 years end, we'll have to bring cash to the table to keep from losing the house -- we will not be able to refinance it at that time unless we add a chunk of money to the equity. And because I will never get another full-time job at my age, we will simply not have the cash to do that. Effectively, we will have been paying rent on that house at a rate far above the going rental rate in that neighborhood.
M'hijito (my son), who lives in the house, is feeling trapped. He'd thought we would be in a position to sell in five years, given that the market seemed to be at or near its lowest point at the time we bought. Because we failed to recognize that real estate was in free fall, we completely misjudged the actual value of the house, and now, along with 25% of the other mortgage payers in this state, we are nailed into an investment that is worth nothing like what we bargained for. Because you don't realize a loss until you sell, we're hanging on and hoping values will turn around. But realistically, it's going to take a long, long time to break even on that place, and we certainly will never make a profit.
Meanwhile, he would like to go to graduate school (can't, as long as he has to help make that mortgage payment) and he would like to go back to San Francisco (can't, as long as we have an albatross tied around our necks). Because we can't rent the house for what we're paying on it, our options are very limited.
What else we can do
There's really only one option if he wants or needs to leave: I sell my house, use the proceeds to pay off the mortgage on that house, and move in there.
It's a pretty little house, and the truth is, it's a better size for me. It has no pool, so that would be one fewer cost and lots less work. It's more centrally located -- within walking distance (sort of) of the light-rail line and my favorite upscale grocer (where I no longer can afford to shop).
On the other hand, the summer utility bills are much higher than mine, and the neighborhood is not the best. Although my neighborhood also has some dangerous slums nearby, it at least doesn't have a Wal-Mart around the corner contributing to the crime rates, and I do have a very pleasant park less than two blocks from the front door.
Really, in terms of living conditions it probably would be a toss-up. I certainly could stand to live there. If that's what we have to do to make it possible for him to get on to the next stage of his life, the world won't end.
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