Ask The Money Coach

Posts Tagged ‘Homeownership’

Q: I am Single and Work One Job. My Mortgage is Upside Down. The Mortgage Company Keeps Tacking on Fees Other Than Late Fees. Is it Legal for a Mortgage Company to Send You a Late Notice and Charge You Even When You Know You’re Late?

A: Yes, a mortgage company can send you late notices and tack on late charges to your mortgage when you don’t pay on time. Unfortunately, those fees can add up, because sometimes they include penalties, added interest, collection costs, and maybe even attorney’s fees if they have to get lawyers involved. It doesn’t sound like you’re at the point of foreclosure, but clearly you are in a very difficult financial predicament. Based on everything else you said to me, it seems that you bought your home in 1990 when you children lived at home, but now they’re gone. You described a roof problem which will take $3,000 to repair, and you also have the added financial burden of having recently taken in 3 of your grandchildren. I think you need to be realistic about your circumstances and consider whether or not you can afford to live in the home you currently have. Chances are, the home is too big for you all by yourself. Also, I recommend that you begin the process of telling your adult children that you can not afford to take care of their children. I admire the love and selflessness that you have shown in taking care of your grandkids, but this entire situation sounds like simply too much. Unless your children are providing significant financial support for you to keep their kids (which I doubt), I think you should unwind that situation and simply tell your family that you are being buried under a mountain of bills. You said that you have a car note, as well as credit card bills, some of which have been sent to collection agencies, so that tells me you are really struggling to keep your head above water. Since you are working, talk also to your mortgage lender and see if they have any options to offer you, such as a forbearance or deferment on your loan, or perhaps a loan modification. Also look into the Obama plan, www.MakingHomeAffordable.gov and see if you qualify for that program. Good luck!

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Q: For the First Time in 22 Years I Can’t Make My Mortgage Payment. It Will Get Paid Via a Little Help From the Mortgage Company But I am Very Concerned. I Am Living in the Red by About $400 Each Month. When Do I Say Enough is Enough and Stop Paying Certain Creditors to Pay Other Debts? I Have Credit Scores From 730 to 760.

A: I’m sorry to hear that you are in a financial bind. But you’ve definitely taken the first step to turn things around financially, which is to recognize that you do indeed have a big problem. Maybe you were in denial in the past, or maybe your economic fortunes simply changed recently for some reason. Whatever the case, you seem to acknowledge that things can’t go on the way they have been. Not with you living $400 in the red each month.

If you’ve had a home for 22 years without missing any payments, I would hate to see you lose your house, so I hope you’re not talking about skipping payments on the home. Probably not. Since it sounds like you’ve reached out to your mortgage lender and received at least some support. I assume you are considering not paying other creditors, like credit card companies or perhaps your auto lender, that kind of thing.

I would suggest you take two steps. The first is to do an honest assessment and overhaul of your budget. Even if you get some relief from your creditors, it won’t do you any long term good if you are deficit spending. Go over your spending with a fine-tooth comb and see where you can cut back. Surely there are some areas/expenses you are willing to sacrifice or slash in order to keep your home, maintain your very good credit rating, and have financial peace of mind. Read this post about how to create a proper budget and this article on overhauling your budget too.

Additionally, before you simply stop paying creditors, contact each one directly and see what options, if any, might exist. Perhaps some of them are willing to put you on a deferred payment plan. You suggested in your email that a six-month reprieve from certain payments would give you some breathing room. Tell that to your creditors. If you make small token payments, that may show a “good faith” effort on your part, and it may keep bill collectors and creditors from hounding you. But those partial payments won’t necessarily stop creditors from reporting you to the credit bureaus. Anytime a debt is not paid as originally agreed, the creditor has the legal right to report that information to the major credit reporting agencies: Equifax, Experian and TransUnion.

If your creditors won’t offer any relief, and there’s nothing else in your budget to cut, yet you find yourself still in the red, then yes, it’s time to “cry Uncle.” At that point, I would make strategic decisions about what bills get paid first and which are second and third-tier obligations. See this TV interview in which I explain how to prioritize bills when you can’t afford to pay everything. Good luck!

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Q: I Purchased a Two-Family Home After I Graduated with the Intention of Building Equity and Eventually Selling the House So I Could Pay Off My Student Loans Quicker. I Had Always Planned to Sell My Home in About 5 Years. But Several People Have Advised Me to Hold on to the House for at Least the Next 20 Years so that the Mortgage Will Eventually be Paid for With Rent Money and I Can Get the Full Value of the Home When I Do Sell It. Is This a Smart Thing to Do For Someone Who Pays Back About $600 in Student Loans Every Month? I Really Want to Be Free of My Student Loans in 10 Years or Less.

A: I don’t agree with the advice you’ve been given. I think it represents old-time thinking. Gone are the day when people had to (or wanted to) keep a home forever just for the sake of having a having a home that was owned free and clear. Don’t get me wrong: It’s still great to have a mortgage free property. But in your case, this sounds like a rental and perhaps not your primary residence. Even if you do live in one part of this two-family home, it sounds like the whole point of why you bought it was to pay off those student loans as quickly as possible. In other words, this property was an investment. Pure and simple. So you shouldn’t get emotionally wrapped up in it and feel like you need to keep it until it’s paid off.

Neither do you need to wait until the 30 year mortgage is paid off in order to get the financial benefits of property ownership. So if your goal is to quickly rid yourself of those student loans, by all means, I would encourage you to look into selling the property.

One caveat applies, however: You said you bought it with the hopes that it would appreciate and then you could sell it. I don’t know how long you’ve owned this home. But if you bought in in the past 2 to 5 years, it’s possible that it may have done the opposite of what you’d hoped — not appreciated, but actually fallen in value. If this is the case, your equity may have been diminished or wiped out completely, making a sale difficult. Under these circumstances, I would advise you to hold on to the property for a year or two longer – or at least until the real estate market turns around.

Here’s what to do right now. Get a local real estate expert to come see your property and give you a comprehensive market analysis, which will tell how you much you could likely sell the home for in the current market. If the home isn’t “under water” — meaning you own  more on the home than it’s worth — then you can consider selling it. If all works out, and you reap a chunk of money from your real estate sale, you’d be wise to pay off those student loans, or at a minimum to knock out a huge part of your college debt.

Keep some money from the sale of your home, if you can, just to have some extra cash in the bank. It’s always good to have additional savings, because you never know when unexpected circumstances may arrive that force you to tap into your emergency fund. Also, if something unanticipated happens – such as a job layoff – you’ll have some savings to tide you over, and you won’t wind up in credit card debt.

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Q: I Have a First Mortgage of $89,000 at 5.25% and 10 Years Remaining. Also a Second Mortgage of $20,000 at 6.0% and 7 Years Remaining. Is it a Good Idea to Refinance These Loans at 5.0% for 15 Years and Closing Costs of $7,000?

A: It probably does not make sense to refinance your existing mortgages. The wisdom of refinancing depends on three primary factors: 1) How long you plan to stay in the house; 2) How much a refinancing will cost; and 3) Whether your goal in refinancing is to save money on interest/finance charges over the long-run, or to simply free up monthly cash flow in the short term. To better help you understand your situation, I ran some numbers for you, using the mortgage calculator on Bankrate.com. Here is what I found.

For your first mortgage, your monthly payments should now be about $955 a month, including principal and interest. For your second mortgage, your payments should be about $292 a month. Therefore, I estimate your total mortgage costs to currently be at: $1,247 per month.

If you keep your existing loans, you will pay a total of $114,588 on the first mortgage, including $25,588 in interest over the next 10 years.
You will also pay a total of $24,542 on the second mortgage, including $4,542 in interest over the next seven years. Your total interest to be repaid over the remaining life of these loans is: $30,130.

By comparison, getting a new 15-year mortgage at a 5% rate means you’d cut your monthly costs by more than 30%. Your new payment would be $862, instead of $1,247 per month. You would be netting a monthly savings of $385. Since your closing costs are $7,000, it would only take about 18 months to recoup those closing costs and “break even” on your refinancing. So as long as you live in the home for at least a year and a half, the refinancing appears to make financial sense. And I know that these numbers initially look very attractive because who wouldn’t want to reduce their monthly expenses by $385?

If you plan to stay much longer, however, perhaps 7 years or more – or maybe even until the mortgage is paid off, this isn’t a smart move. Over the new 15-year term you would pay a total of $155,154, including $46,154 in interest. Based solely on the interest charges to be paid, the new mortgage would not be as good a deal as you currently have. If you keep your present loans, you’ll save $16,024 in interest (by paying only $30,130 instead of $46,154).

Plus, when you factor in the additional $7,000 in closing costs required for the new loan, it’s clear that you should just keep the mortgages you currently have. Not only will you pay less money over time, you’ll also own your home free and clear faster — up to five years sooner than you would with a new, longer, 15-year mortgage.

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