Loans Answers

Rescue me, Mortgage Advice Needed!

Question: Hi All, after reading through a few postings here I thought someone might be able to give me some simple and practical financial advice. We are looking at a few different re-financing and selling options for our home but our credit situation is really creating some limitations for us. Here is a quick thumbnail of what seems to be primary factors in the loan qualification process.

** Total debt without mortgage is $34,500. ** Mortgage balance is approximately $300,000 ** Home value is $370,000 ** Monthly Net Income is $5800 ** Monthly Mortgage = 5 yr ARM = $2515, ** Monthly Bills = $3 x C.Card, 1 x C. Cards, 1 x Car Pymt ** Monthly Budget including above = $5,500 ** Icky FICO scores are T.Union = 552 Exper.= 549 Equifax = 533

** Discover – Balance= $11k Monthly= $225 ** B of A – Balance= $8k Monthly= $200 ** Bank One Balance= $2K Monthly= $50 ** AMEX Balance= $10K Monthly= $150 ** Car Loan Balance= $17,500 Monthly= $477

We love the house we have now but after 5 years of mis-managing our money we have painted ourselves into a corner. Although we have shown a tremendous amount of focus and discipline to pay off debt and lower our month to month bills in the past year we are still under water. We are both college grads, my husband is in technology and has done well but after 3 years with his company his division was eliminated and he was laid off this past January. I am a stay at home mom and he has taken a job opportunity with a base salary of $80K. He has some large projects closing in 4-6 months but since he is starting over again additional income from commissions will take some time. I believe the past 3 years his W2’s show approx $160K, $220K,$170K.

So we are trying to lower our monthly bills/budget from $5,500 to around $3K and are not sure what options are available (given the above) and which one make the most sense. The timing is critical since we are getting behind more and more each month. I would love some simple advice and ideas on how to get us out of deficit spending during the next 12 months. This should be enough time for our income to grow and get us to a single mortgage payment and no other debt.

Option 1 : Refinance Existing Mortgage

Can we refinance our existing $300,000 5/1 ARM with Flagstar by using the $70K of equity as a down payment? We went through a refi process about 3 months ago with Lending Connection and it was very high in fees and interest which made it difficult to calculate the benefit. Our existing mortgage payment is $2515.

Option 2 : Home Equity Loan of $31,000 to payoff all bills (leaving just a mortgage, equity payment & car payment)

** Discover – Balance= $11k Monthly= $225 ** B of A – Balance= $8k Monthly= $200 ** Bank One Balance= $2K Monthly= $50 ** AMEX Balance= $10K Monthly= $100 **** Totals = $31K and $525

Option 2a : Include Car Loan with above (leaving just mortgage & equity)

** Car Loan Balance= $17,500 Monthly= $477

Option 3 : Sell Home By Owner and purchase less expensive house ($225K is minimum), but at what interest rate???

** If we sell by owner at $360,000 we would have approximately $50K cash in hand ** Assuming approx. $10K in loan fees for new house, how do use the remaining $40k. Required down payment vs. payoff debt? ** Do we risk not being able to qualify for a new and smaller mortgage after sales due to credit or have equal or higher payment because of high interest rate? ** Selling FSBO takes much longer, we don’t have much time without more lates on our credit.

Option 4 : Sell Home With Realtor ** If we sell with a realtor at $370,000, pay 2% for listing agent and 3% buyers agent fees would equal about $18,500 ** After all fees we would have approximately $50K in cash ** Same questions as above, weighing the loan qualification, down payment requires, paying off debt to lower total monthly debt.

BOTTOM LINE. DO WE GAIN ANYTHING BY SELLING AND PAYING RELATED FEES, TAKING ON HIGHER INTEREST RATE, OR SHOULD WE JUST SIT TIGHT IN THE HOUSE AND GET THROUGH THIS TOUGH PERIOD AND DEAL WITH MORE DAMAGE TO OUR CREDIT????

If you don’t mind copying any responces to my email address it would be great! I really do appreciate any advice you may have.

Thanks HB

Answer: First, I am confused. You are that total debt is $34,500, but then go on to list $48,500 in credit card and car loans. Is this $34,500 on top of the $48,500? If so, what is it for?

2nd, you cannot afford the car you have. No one in their right mind pays for a high-end luxury car with a loan. Get rid of the car, and get rid of the $477 a month payment. Then buy a $1500 used car with cash, and drive that until you are out of this debt problem. Yes, you will look kind of silly driving to work in an older car, but stop and think how silly you will look if you go bankrupt, and have to walk to work after they take the car away?

3rd, the credit card payments are not all that high. Use the $477 a month from the car to knock these off. Pay off the Bank One right away, then use the extra cashflow to attack the Bank Of America card. Once those two are gone, then dedicate your efforts to Discover and Amex. In the mean time, cancel all of these cards and stop using borrowed money to pay for everyday life. You never finance a delivered pizza over 20 years using a credit card. It just isn’t smart.

4th, you got yourself screwed on the home re-fi. They stuck with an ARM. I cannot tell from your limited details if this is a 1 year adjustable that expires in 5 years as a baloon, or if it is a 5/25 that is fixed for 5, and then becomes a 1 year adjustable for the remaining 25 years. In either case, these are time-bombs just waiting to explode. Since interest is going up, and the government has plans to move interest up ever further, your $2500 payment can become a $3500 payment overnight. Could you handle that happening?

The bottom line for you is what you thing will happen in the future. With your current income, you can dig yourself out of debt easily if you didn’t have a luxury home and a high-end luxury car. If you sell the house and buy an normal house, and ditch the car and buy a used car (at least until you can save up and buy a new car without getting a loan), you have no problem making your payments, living well, and paying off the debt.

If your future income will go up by $50K to $75K a year, then you probably can hang on until then, and take care of this stuff when that time comes. In the mean time, you will have to make some cuts. You will have to cut your lifestyle a bit, and the car has to go. If you are not willing to do that, this thing will implode on your before your income makes that jump that you are expecting in the future.

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