The mantra of homeowners in trouble repeats: modify my mortgage so I can continue paying. My counterpoint injects: before you jump into a loan modification, consider how long you can (or want to ) continue to pay.
Mortgage modification started out addressing the problem of sub prime loans with unsustainable loan terms including adjustable rates and deceptive, interest-only intervals. Modifications addressed that problem by extending the life of the loan and fixing the interest rate , with a very low rate in the immediate term.
Over the past couple of years, a new element has been added to the equation: dramatic drops in home values. Making loan terms affordable on a month to month basis does not address the issue of “what then”? Where is the homeowner when it is time to move from the underwater house?
Lenders have mightily resisted lowering the principal balance on home loans, even though if they were to foreclose, it is the value of the house today which measures what they get back, not necessarily the loan balance. So long as the loan balance remains unchanged, or is even increased by adding arrears to the balance in the course of the modification, the home remains underwater and unsalable in the usual fashion.
Who cares, if the home is perfect for you now and for as long as you can foresee. Even if it never has equity, if it fits your budget and your life needs, modifying the loan allows you to stay where you are.
But how many of us can envision of life without changes: changes in family size, job location, available income? Any one of those changes could require relocation. And the underwater house is saleable only in a short sale approved by the lender or in foreclosure.
The people I counsel are often recovering from severe hits to their financial health, often leading to bankruptcy. So grateful to have gotten a loan modification, they don’t look ahead to the exit strategy as to the house. Disposing of the underwater house 5–10 years from now will bring a repeat of derogatory credit reports and possibly income taxes on the difference between loan balance and fair market value of the house.
I have no universal rule or analytic tool to determine when a loan modification is a long run winner. It depends on how far underwater the house is, how the real estate market performs in the future, how your life changes, and how long your perspective is. But I am adamant that we need to give thought to the future when signing on to keep paying on the underwater house.
Image courtesy of emples.
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that’s why I usually ask a client, “how long do you plan to be in that home?” Because “equity” is a cyclical function but if the homeowner has not thought whether they _need_ to be in that particular home, it will be hard for them to evaluate whether or not to keep throwing money at the problem.
Bravo, Julia. I feel like the Grinch to challenge the idea that keeping the house is everything, but these unsettling questions need to be asked sooner rather than later.
[...] questions surrounding mortgage modifications and underwater houses are big ticket items. Keep reading and keep thinking about how this impacts your financial [...]
[...] As always in a down real estate market, you need to determine whether you should keep the house. and what the viability of a modified mortgage is. [...]
[...] you jump into a loan modification, consider how long you can (or want to ) continue to pay, Cathy [...]
This LA Times story highlights the problems of being tied to an unsaleable house, though the couple in the story had not modified their mortgage.
http://www.latimes.com/news/nationworld/nation/la-na-underwater-homeowners-20110531,0,6176564.story