REThink Real Estate
By Tara-Nicholle Nelson, Friday, January 9, 2009.
Q: I got an interest-only loan on my house three years ago, and while I still have two more years on this loan, my house is upside down on what I paid for it versus what I could sell it for today. Is there any help for people like me with a bad loan?
A: First things first. There is no such thing as a "bad loan"; there are just improper uses of loans.
I have never met a loan I couldn't envision a legitimate, proper use for. Don't believe the hype that says if you don't have a 30-year-fixed-rate mortgage your sky is necessarily falling. The same statistics that say 10 percent of homeowners are in trouble on their mortgages indicate that 90 percent of them are not -- and many of those who are not have loans similar to yours. Remember that "interest-only" means that your minimum payment is based on the interest incurred; you are welcome to pay more monthly to reduce your principal, if you so choose!
Secondly, whether there is help for you depends on the precise nature of your dilemma, if there truly is one at hand, and what sort of help you are looking for. You haven't said that you can't afford to keep making your payment right now. You also haven't said that you need or want to sell your home -- just that you couldn't sell it for what you owe on it.
I think your issue is really important, as many folks I run into are upside down on their homes (meaning they owe more on it than it could be sold for today) because they borrowed against it after they bought it, not because it has decreased in value below what they paid for it. While I understand the tendency to get concerned about being upside down, the fact is that when you buy a home, you must understand that is an asset that may go up and down in value. It's not something you necessarily just walk away from because it has a dip in value. People who have owned their homes for 30 years have definitely experienced increases and decreases in value, but come out ahead in the long run if they hold onto them.
Part of the reason this current foreclosure crisis has snowballed so severely is the "disposable-home-mindset" epidemic. It's as though many who bought in the last five years were conditioned to expect that their homes would only increase in value, even in the short term, so that if they decreased in value at all, it made sense to simply walk away. Don't fall into this -- yes, there are circumstances in which an (im)perfect storm of reduced income or losing a job, divorce, illness, mortgage adjustments and/or a severely decreased home value may make holding onto a home impossible for a homeowner or a family. But if you are not in any immediate danger of being unable to pay your mortgage, I urge you to take a longer-term view of the financial and lifestyle advantages of homeownership when you make decisions about your property.
Need-to-Knows and Action Plan
Whether you can engineer a long-term win on your home does hinge, in part, on whether you can engineer a sustainable mortgage. Get clear on what help you are looking for. If you are looking to keep your home and avoid a rate/payment adjustment, lenders are increasingly willing to "fix" interest-only loans. This is the mortgage industry's best shot at a double entendre: fix the loan, as in correct what is broken, and fix the loan, as in modify an adjustable-rate mortgage (ARM) into a fixed-rate mortgage. Contact your lender's loss mitigation or home retention department to discuss loan modification. However, I would encourage you to wait until nearer to the scheduled adjustment before you contact them -- loan modification solutions are rapidly evolving to be more favorable to borrowers, and lenders tend not to see any urgent reason to justify a loan modification unless there is an impending adjustment coming up much sooner than two years away.
If you want to sell your home, a short sale is a type of loan modification by which you sell it at a price below what you owe on it, and your lender(s) forgive part of your debt. If you don't really want or need to sell right now, I wouldn't attempt this yet either. Short sales are notoriously difficult to get lenders to agree to, especially if the seller has no pressing hardship or need to sell. Also, many experts predict that home values will begin to stabilize in the last quarter of 2009. Reevaluate your situation and your home's value during the last year of your fixed-rate period. Your home's value might be closer to what you owe at that time.