Friday, March 16

Subprime Mortgage's- Easy to get into, hard to get out of!

If someone is in a sub prime mortgage, why not just refinance into something different? Easier said than done. These mortgages were very easy to get into, but are often very difficult to get out of.


First, many borrowed 125% of their property value with a Payment Option ARM, believing the lender that told them that in a rising real estate environment, after a few years the loan to value (LTV) would balance. What they weren't telling them was that the minimum payment was interest only and by making an interest only payment, the balance owed would stay the same. So, now the person who has paid on this loan for a year or two, hasn't missed a payment on the mortgage, or with anyone else, wants to refinance. Much to their dismay, they cannot find a better deal because the LTV is still over 100%.

Second, there are probably steep prepayment penalties that further add insult to injury. These can add thousands to an already huge payoff. Unless the homeowner has socked away the money that they were 'saving' by making interest only payments, or if they won a lottery or received an inheritance, chances are that the borrower cannot come up with the cash to pay penalties. Moreover, because they're already upside down in their property, that is that the property is worth less than what is owed against it, they don't have money to pay down the principal.

Third, because these loans came with a variable loan rate, many of them have adjusted. Many stories in USA Today and New York Times talk about homeowners whose payment went from $500 per month to $1500 per month. Although these borrowers qualified for and could afford a $500 payment, they would never have qualified for a $1,500 payment on a conventional loan. Now, because they cannot afford the payment, they've fallen behind; some as much as 6 months behind on their mortgage! It becomes next to impossible to find someone to refinance with if you're 180 days late on a payment!

If you have one of these subprime loans, you might be able to negotiate a settlement with the lender. For example, you owe $100,000 on a home that is worth $90,000. You have saved a few bucks or could otherwise come up with a few thousand dollars to put towards the balance. Ask the lender to settle on $90,000, the value of the home. Give them a recent market opinion for a licensed real estate appraiser to support what you're telling them the current market value is.

If you can get the lender to agree, check with a local credit union about refinancing the loan. If you've had a good payment record over the past few years, you may find that you qualify for more conventional financing through a credit union. With your few thousand dollars to put into the deal, and the negotiated payoff from your current lender, you could very well go from owing $100,000 on a $90,000 property to owing less than $90,000 to your credit union.