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A Little Breathing Room?

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Posted On: 10/05/2011

QUESTION:

Our daughter is ineligible for any assistance with her deeply underwater mortgage because our name is on it as co-signers. What are the pitfalls to the following idea?

1. We pay off the mortgage and replace her name with ours on the deed.

2. We sell it back to her for its current market value. She gets a mortgage in her name only. This reduces her loan rate nearly 2 percent.

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3. We finance a 12-year mortgage to her for the underwater amount.

She would still be liable for the full amount of the original loan. Her total monthly payments would not go down, but at the end of 12 years the second lien would be paid off and she would have a significantly smaller principal balance remaining on the first note.

If we see it correctly, this also would free her to sell her condo in a few years without facing short-sale issues or messing up her credit rating. She’d still owe the balance of the second loan to us, but she’d not be stuck in the tiny condo she now owns. We can scrape together cash to pay it off if we get most of it back right away; but we couldn’t take the chance of getting stuck with the whole amount if this idea is unworkable.

ANSWER:

A more direct and less expensive approach would be to increase the monthly payment so the loan can be repaid entirely in 15 years. The ultimate interest savings would be enormous, perhaps opening the door to cheaper refinancing as the loan balance declines and – maybe – local values rise.

Example: The property has loans worth $300,000 outstanding at 7 percent. The monthly cost for principal and interest is $1,996 per month. To repay the loans in 15 years would require $2,696 monthly, if prepayments are allowed. The total interest cost would go from $418,528 over the life of the loan to $185,366 – a savings of $233,162.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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