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Getting Rid of the Balloon

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Posted On: 05/21/2008

Q: My wife and I are now in our early 60s. Our home was unfortunately refinanced with the world’s worst loan, a mortgage that had low monthly payments for the first three years. The initial start rate is scheduled to end in a few months, at which point payments will soar. We are fortunate because we have equity in our home, and we have generally good credit. How do we get out of this mess?

A: Given that you are owner-occupants with both good credit and equity, you would seem to be ideal candidates for a fixed-rate loan. However, a caution: By any chance does your loan have a prepayment penalty? If yes, it may be cheaper to pay higher payments for a few months and to then refinance once the prepayment period is over. For specifics, speak with several local lenders.

Given your age there is also another alternative you might want consider. Why not look into a reverse mortgage? There are no monthly payments with such loans, and if the numbers are right you could refinance your current loan with a reverse mortgage. However, reverse mortgages are complex, and they do have hefty up-front costs. For details speak with lenders, but check with an attorney who specializes in elder law before signing up for any program.

Q: I bought an investment condo a few years ago with virtually nothing down. The marketplace has now shifted, values have declined and I can’t begin to sell the place for what I paid. I keep hearing about government efforts to help borrowers. Can the government help me?

A: As of this writing, the government has divided property owners into two groups: owner-occupants and investors. It claims that it’s ready and willing to help failing homeowners through the FHASecure program, but as of mid-February, fewer than 1,500 delinquent conventional borrowers nationwide had been able to refinance under FHASecure. There have also been big announcements about outreach efforts, but such programs have not resulted in reduced foreclosure levels. Meanwhile, more than 200,000 homeowners are receiving foreclosure notices each month, according to RealtyTrac.com.

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Federal officials have been very clear that their programs, as minimal and flawed as they have been, are off-limits to investors. For example, Treasury Secretary Henry Paulson has said, “as our economy works through this difficult period, we will look for additional opportunities to try to avoid preventable foreclosures. However, none of these efforts are a silver bullet that will undo the excesses of the past years, nor are they designed to bail out real-estate speculators or those who committed fraud during the mortgage process. These efforts are to help American families who both want to and can, through a loan modification or refinancing, stay in their homes.”

But the idea of equating investors with those who have committed fraud is both wrong and self-defeating.

We want investors to supply housing units to the tens of millions of people who rent. Without investors we would have a housing shortage and significantly higher rental rates. If this were not true, then why would the government encourage real-estate investment through generous tax benefits?

When a home is foreclosed, a lower sale price will ultimately show up in local records, a lower price that buyers will see when they consider the purchase of a home. To buyers it doesn’t matter if the property was sold by an owner, investor or lender, it only matters that the final price was low. If you’re selling your home or refinancing, lenders will look at recent sales when considering loan amounts and make no distinction between homes sold by investors and properties marketed by owner-occupants.

So, to answer the question, as of this writing you’re not going to get government help.

What can you do? You could refinance into a fixed-rate loan, but with lower values you’ll only be able to get a smaller loan. To pay off the current mortgage you’ll need both new financing and cash.

You could try to modify the loan terms with the current lender. This is likely the best solution for all parties, but it means that the lender will get less interest. Less interest, however, might be a much better alternative than no interest, no payments and no pay-off if the property goes to foreclosure.

Lastly, you need to consider selling. Yes, there will be a loss, but losses on investment transactions are likely to be deductible, and an end to monthly financial hemorrhaging might save you from bankruptcy. For specifics, speak with a tax professional.

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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