Well, If I am the Phat Man, and I’m writing a blog called “Ask The Phat Man,” I might occasionally get a question that needs to be answered. So I recently solicited questions. There are a variety of circumstances that lead to someone having a mortgage payment. Almost everyone would like to lower their monthly payment, but when should you.
The first situation is someone who asks, “How, can I lower my payment if my house has dropped in value and just isn’t worth what it was when I agreed to my payment?” The best solution would be a mortgage modification. If you call your lender and ask them for a modification, they each have their own set of criteria. Follow that and you can often stay in your house for less money.
The majority of people, even with government programs to encourage such activity, still do not qualify for a modification, which leaves people with a couple of options. 1) Do you continue to overpay for your house that has gone down in value or 2) Do you attempt to do something about it. Some people have a moral compass that pushes them toward #1, but assuming that you are not dissuaded by that, there are limited options. Usually the best option is to sell your house. The reason for this is because over 95% of people qualify for a “short sale” with limited or no deficiency. Almost 50% of short sales in the last few months have included a relocation payment to the seller (meaning you can get $3,000 in pocket to sell your house for less than it is worth).
No earthly situation comes without negatives. The negatives of short selling your house, as one might tell you, are basically in two categories. First, the potential knock to your credit score and second, the potential that someone will not deal with you at all because it is a mark on your permanent record. The first is likely unavoidable, unless you want to just throw lots of money at a house that is underwater. Of course, if you had that money, you probably wouldn’t be leveraged to the point of becoming upside down. If you’ve been making your payments, the actual hit to your credit score is less than you think. If you haven’t been making payments, you need not worry, as your score already stinks.
On the other hand, it is becoming easier to work with banks all the time. Recently, the big banks and programs reduced the amount of time to wait to one year. This makes it all the more beneficial to go ahead and sell the house which is more debt than benefit as soon as possible. Regardless of what you might think will happen in the economy, it is undeniable that continuing to pay for something that is worth less than you owe is a worse financial decision, all other things being equal, than to pay for something that is worth exactly what you owe on it.
On the other hand, if the opposite question arises, “What if your home value has gone up but your income has gone down?” This is where a legitimate refinance might be a legitimate option, but you cannot qualify for one, because of your income. You want to take advantage of the potential to lower your payment, but you fear your income is at the point where most companies may not want to give you a mortgage. This is where difficult advice needs to be given. The ratios needed to get loans are in place for a reason. And while Dave Ramsay can teach you better than I can, the reality is that if you are exceeding those ratios, you need to purchase a cheaper home (or cheaper housing option).
The positive of the situation is that you have equity and when you sell your house, you will pocket some change. However, if you cannot qualify to make payments, you are almost assuredly living “above your wage.” Those who are self employed and “hiding” income as write-offs and distributions are the exception, but they also know the game they’re playing already. Take that equity, buy a less expensive home, and decrease your payment. If you cannot afford any home, pay off your other debt, and start investing in Roth IRA’s. When your income is back where you can afford a house payment, purchase again.
If there is some other situation you have, feel free to ask, but often people attempt to lower their payment by refinancing and/or extending the loan they have. This is often counter productive, as it saves a little money now, but it elongates your commitment to pay down the road. Sometimes a little higher payment is advisable. If you can afford a 15-year loan, attempt to do so. If you are paid bi-weekly, attempt to make an extra half-payment on those 3-paycheck months. Pay off your house early. Imagine a life where you are still earning money and you have no house payment! What kind of great life could you have then!