Q. My wife and I purchased a one-bedroom condo in Anaheim at the peak of the market in 2006 for $370,000. We have a first mortgage with Bank of America for $346,000 and a silent second with CalHFA for 12,500. Since our purchase our home has decreased in value and is currently worth $230,000 to $250,000. We never imagined living here for more than three years. Now that three years have passed there is no light at the end of the tunnel. My wife and I want to start a family but find it extremely difficult to do in an 800-square-foot condo. We are struggling with the fact that we are paying a mortgage on a home that has dropped over 30% in value. We have stable jobs and good income. We have been able to save a large portion of money over the last three years. In 2011 our first mortgage adjusts to principal plus interest and increases by about $500 a month. What can we do? We do not want to face foreclosure, and I am reluctant to use our life savings to cover the negative equity on our home if we sell. Are there any new programs we can work on with our lender to get out of this home?
A. I must say I feel for you and while I commend you for wanting to meet ethically the obligations you signed up for, it’s difficult to justify economically. It may be 2015 before your property has any equity in it at all, and it might be 2020 before it is worth $370,000 again.
Assuming for the moment that you are willing to hang in there for such an extended period of time, you can rent that property and buy another home to meet your needs. It comes with conditions. Other people have done this and when they get the loan on their new home, they just walked away from the old home and the old loan. You can imagine that the lenders aren’t thrilled with this. So here are the rules.
Either you prove that you have at least 30% equity in the old home that will become an investment property. You obviously cannot do that so the other way to is to be able to qualify for the loan payment, taxes, and insurance or HOA dues on BOTH properties without credit for any rental income.
You say you have saved a sizeable amount of money so perhaps you have sufficient income to do this. I hope so. Good luck.
AlmostDesperate in Mission Viejo asks:
Q. I have a 1st mortgage with a balance of about $165,000 and rate of 5.25% fixed with Bank of America. The loan is a 20-year loan with about 14 years left to pay. I also have a line of credit balance (interest only) of about $245,000 with an adjustable interest rate (currently 2.99%) with Citibank. My home in Mission Viejo has a current value of about $600,000. I am 51 years old, currently unemployed and feeling the financial pinch. Am I a candidate to refinance to obtain a lower overall payment? Is it a good idea? I have made all my payments and maintain a fico credit score above 750.
A. With some prospects for rising interest rates in the next few years, it would make sense to get that adjustable line of credit fixed by combining the 1st and 2nd into a new fixed-rate loan. However, because of your unemployed status you will not be able to do that now. You have to have the income to qualify for the loan. With rates low right now you are in reasonable shape but I would move to refinance as soon as you find new employment. Note that the monthly payment on the proposed loan would actually increase. The line of credit is now interest-only while the new loan would, almost surely, be fully amortizing.