Home Loan Articles

Most people understand what happens when a bank or lender forecloses on a home: the homeowner (borrower) essentially stops paying the mortgage and the lender has the opportunity to take back and then sell the home to someone else through the process of foreclosure. But high foreclosure rates are just one of the problems facing the housing industry. Another problem for both banks as well as homeowners is the large amount of home equity loans and home equity lines of credit that are also being defaulted on as home values drop and the job market stagnates.

Avoiding Foreclosure

First, some good news. If you have a mortgage as well as a home equity loan and you are able to only afford one, you may still be able to avoid foreclosure by choosing the right loan to pay off. First, we need to look at each type of loan and what it really is.

A mortgage is a loan from a bank which allows you to buy a house, but there’s more to it than that. Essentially, the bank buys the house from a seller and then holds the house for you. Each month you pay the bank a portion of the money plus a little interest (which is how the bank makes a profit). In return for this interest you are allowed to live in the house. Your mortgage loan is, essentially, a secured loan against a house. This means that if you stop paying the loan then the bank has the right to take back your home and sell it to someone else. Your home is essentially the collateral on your mortgage.

A home equity loan starts out in a similar way: the bank loans you money in return for a portion of the value of your home. So if your home is worth $200,000 and you only owe the bank $100,000 then you essentially have $100,000 of “stored value” or equity in your home. A bank may then offer you $50,000 cash as a home equity loan, knowing that if you default on the loan then they may still be able to sell your home and get their $50,000 back. Again, this is essentially a secured loan against the rising market value of your house. You can read an expanded explanation of secure vs unsecured loans online.

But what if your home’s value drops back down to $120,000 instead of $200,000? That essentially means that you no longer have the equity in your home that you once had. Your “secured” home equity loan becomes an “unsecured” loan because the equity that once served as collateral as all but disappeared.

Now that you see what is happening with foreclosures and home equity loans, let’s make some intelligent decisions. If you are faced with the prospect of only being able to pay your mortgage or your home equity loan (which is usually, but not always, much less than your mortgage) then you should probably choose to pay your mortgage on time. The size of the loan makes a big difference in this case, but it is also generally more difficult for a bank or lender to fight a homeowner that stops paying a home equity loan when the equity is gone. Banks rarely are able to actually foreclose on a home for an unpaid home equity loan simply because another bank often owns the mortgage.

When someone defaults on a home equity loan the bank generally has two options. The bank can modify your loan or, in rare cases, actually forgive it. More likely, though, the bank can sue you in court just as they might if you had taken out an unsecured loan and then defaulted on it. This is a time-consuming and expensive process for a bank and, in some cases, is simply not worth it. If they do file a successful lawsuit against you then you may indeed be liable for paying back the home equity loan through garnished wages or through a modified payment plan.

Home Equity Loans After Foreclosure

After your home is foreclosed upon there is still the problem of having an open home equity loan. Once the bank takes your home it has the opportunity to sell it to another buyer. If the sale of the home generates enough money to pay of both the mortgage and the home equity loan then you may be off the hook for any debt.

In today’s housing market, though, more and more homes are underwater and selling for much less than the amount of money owed on them. Again, this means that your secured home equity loan may, in essence, turn into an unsecured personal loan. You could very well be liable to pay back that money and, in many states, you could be sued. That being said, some states do have laws which don’t allow lenders to come after you if you used that home equity loan money to actually purchase the home. The most common type of home loan that allows you to spend you home equity loan on the purchase of a home is called an 80/20 loan and it allows you take out one loan for 80% of the value of the home and a second loan (often lumped together with the first) for the additional 20% value of the home based on the equity value of the house. These types of loans are rarely offered due to the limited amount of equity available on most homes that are bought and sold today.

The amount of many home equity loans is so substantial that they should almost always be factored into the decision when deciding if you should walk around from your home. Even if you walk away from your home and your house is foreclosed on, the amount of money you owe through a home equity loan or open home equity line of credit could be staggering.

Home sales are lagging ever since all the special government home buyer incentives and tax credits dried up, so banks are pushing down mortgage interest rates to lows not seen in the past 30 years. Many people, especially those who bought their homes in the last 10 years or so, are asking themselves, “Should I refinance my mortgage?” and “Should I refinance my home loan and pay off other debt with these low rates?”

Only you can ultimately decide if this is the best finance move for you, but are are some of the things you should think about when you’re considering refinancing your home loan:

Current Mortgage Interest Rate Vs. New Mortgage Interest Rate: This is the most obvious thing to think about. If you originally bought your home with an 8% fixed interest rate loan or if you adjustable rate has risen over the year and yet you can get a fixed rate home loan today for about 5%, then refinancing your mortage could work out to be a good deal for you. But remember, when you refinance your home you have to pay a number of fees for filing paperwork, new home inspections, legal review and other services, so it won’t be all savings. Generally, when the new rate is more than 2% less than your old mortgage rate you should seriously look into whether or not you can save a fair bit of money over the long run.

Adjustable Rate vs Fixed Rate: If you have an adjustable rate mortgage now and your rates are good, you may still want to consider switching over to an equally low fixed-rate mortgage. While there are no guarantees, the chances are good that rates will rise again at some point over the life of your home loan, so locking in a fixed rate mortgage when you have a chance could end up saving you lots of money over the life of the loan, even though it may not make much difference in your monthly payments at the moment.

The Home Equity Problem: A lot of people have lost a fair amount of home equity over the past several years as home values have plummeted. This means that even though you’ve been paying your mortgage for years you may actually be underwater on the home loan or still not have much equity built up. Most mortgage companies and banks require your mortgage refinancing amount to be no more than 80% of your home’s actual value. So if your home is now valued at $200,000 you would only be able to refinance $160,000 ($200,000 x .80 = $160,000). In this example you could probably only refinance your home if the amount of money you owed on your existing mortgage was less than $160,000.

All About Mortgages: Insider Tips to Finance or Refinance Your Home in Today’s Economy

Another Thirty Years of Payments: Most mortgages are still 30-year terms. If your current mortgage was a 30-year mortgage but you’ve already been paying for 5 years, then you only really have 25 more years of payments until you own your home outright. If you refinance your home then the clock is essentially reset and you’ll once again be making home loan payments for 30 years from the day you sign the papers. This extra five years could push back your retirement investing plans or even impact when ultimately decide to quit working.

Are you Selling Your Home Soon: You probably don’t want to refinance your home if you’re going planning to be moving within the next several years. You may save some money on your monthly payments, but the refinancing fees may still end up costing more than you would ultimately save in the next few years. It also doesn’t help improve your credit score and it may actually hurt your chances of getting a decent interest rate on the loan you take out for your new home.

Do You Really Need the Extra Cash: Many people take advantage of home loan refinancing so that they can essentially borrow more money at the same or lower rate than they are paying now. They then use that extra money to pay off additional bills or car loans or other outstanding debt. But loan interest rates across the board are much lower these days, so many people are finding that borrowing money from a home loan at 5% to pay off a car loan that only has a 2% or lower interest rate simply doesn’t make sense. Many people have also downsized their economic needs in this recession and are now saving more money than ever. Overall, the “need” for money is not as great as it once was. If you’re happy with your current home loan and you find that refinancing won’t really save you very much money in monthly payments then it may not be worth borrowing just for the sake of taking out another loan.

While simple online loan calculators are good for giving you a general estimate of what you might pay with a refinanced mortgage, the exact fees and monthly payments will have to be worked out by individual lenders. One bank or institution may charge for certain services that another lender offers for free. You’ll also want to keep in mind that there is usually a lot of paperwork, phone calls and other things that you have to do to refinance your home loan, so it’s not something you want to jump into unless you have are willing to commit some time and energy into making sure you find the best deal you can. That being said, the low mortgage rates being offered by different banks and lending institutions are definitely making refinancing a home loan a much more attractive offer for many existing homeowners!

Sure, it sounds simple: just walk away from you home and leave your worries behind. But there are lots of things to actually plan and think about before you walk away from your mortgage, your home and everything you know. You will have larger decisions to make than “Should I leave the keys in the door or should I mail them back to the mortgage company?”

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Once you decide to stop paying the mortgage and leave your home, you don’t immediately have to run out the door. You actually have a lot of work to do as you prepare for your eventual foreclosure and possible bankruptcy. And make no mistake about it: if you stop paying your mortgage then both scenarios are very likely. The decision to purposely walk away from your home and your mortgage is called a “strategic default” and it is being done by more and more people when they find that they are severely underwater with their mortgage.

Generally, once you decide to leave your home and stop paying your mortgage you should not immediately move out. Instead, you should do a number of things while you continue to live in your home. And be forewarned that with the record number of people walking away from their homes it is becoming more and more common to have a long waiting period between the time you actually stop paying your mortgage to the time when you are eventually evicted or kicked out of your home. Some mortgage lenders are taking one or two years or more before they even send out a default notice. Banks know that as long as someone is still in the home then the home still has value and could, potentially, lead to payments being received in the future. Some banks are even deciding that it’s “too costly” to go after people who have stopping paying their mortgage for the time being and are literally allow people to live completely mortgage and rent free until they figure out how to handle the problem.

The important lesson here is: you will have some time, maybe months, maybe years, before you are actually kicked out of your house. Evictions don’t happen in the middle of the night anymore. You will more than likely get plenty of notice before you have to leave, so you might as well put that time to some good use. Here are some of the things to think about when it comes to leaving your home for the bank:

Make Sure you Need to Go: This sounds like a no-brainer, but you may actually have some options available to you that could keep you in your home. The first step is to make sure you really need to leave your house or if you can actually work with your bank to modify your mortgage. You may be able to short sell your home and actually make a little money out of the deal, so don’t immediately assume that you have to take a total loss on your house. If you come to the conclusion that walking away from your house and leaving the keys in the door is your best option, then you’ll have other things to plan for before you go.

Speak With A Lawyer: Talking to an attorney in cases where you have to break a contract with a bank is always a good idea. Yes, it may cost you a little bit of money, but it may be substantially less than the $1,000 a for-profit service like http://www.youwalkaway.com/ may charge and you’ll want to be sure that you’re doing things correctly and that you aren’t leaving yourself open for lawsuits or other legal troubles down the line. Different states handle home foreclosures and abandonments differently, and an experience attorney should be able to answer any specific questions you have about how the bank will proceed into its foreclosure and whether or not you’ll have to claim bankruptcy or not.

Notify Your Bank: This step may depend upon the advice you get from your attorney, but many lawyers recommend notifying the bank and informing them of your intent to stop paying your mortgage. This step alone can sometimes be beneficial when working with a bank to modify a home loan. A lot of banks and mortgage companies are so backlogged with loan defaults that they purposely make the decision to only work with the “most severe” cases where they stand a chance of losing the most money. By telling your bank that you’ll be walking away from the loan they have a much larger incentive to work with you: if they don’t then they won’t receive any more payments from you.

Find A Place To Live: Leaving your home is rough, but finding an adequate place to live can be even more difficult. You will want to try to work out something in advance of your house being foreclosed on. You can arrange to live with a friend or relative or you can rent a place of your own. You may even be able to buy a smaller home, depending upon your financial situation. It’s very important that you make living arrangements before you actually leave your home because once you do there’s a good chance that a foreclosure or bankruptcy will damage your credit rating for years. With a poor credit score you may have a difficult time actually finding a place to rent or live because many landlords check credit histories before allowing people to sign a lease.

Save Money and Pay Bills: Just because you’re not paying your mortgage doesn’t mean that you should not pay any bills at all. In fact, you should be using that money that would normally go to your mortgage payment to “clean up” any outstanding debt you might have and get yourself on more stable financial footing. You should try to put away as much money as possible because you’ll eventually need that money when it comes time to rent or buy another home. Likewise, you’ll need money for moving expenses and other expenses which may arise. The idea of leaving your home is a scary one, but it’s also a decision that should be done for financial gain. You should not go on a spending spree for things you don’t need. Instead you should be doing everything you can to “start over” and get yourself into a better financial standing build reducing your debt and building a cushion of savings as a “rainy day” fund. Likewise, going on frivolous spending sprees could look bad if you later file for bankruptcy. This is technically a form of fraud and bankruptcy courts look down upon it.

Move Items Into Storage: Moving out of a house and into a rented apartment or townhouse can be a dramatic experience and you will more than likely not have room for all the furniture or other things you have accumulated over time. If they are meaningful to you then you might consider renting a storage unit and beginning to move furniture and other important items into that storage unit so that when you physically leave your house with the keys in the door you don’t have to worry about moving with truckloads of stuff. If you have items that you aren’t personally attached to or don’t need to save, then consider having a yard sale or donating them to charity for the tax write-off. This is a perfect time to “de-clutter” your home.

Pay Property Taxes: Again, this may depend upon your attorney’s advice or your financial situation, but you it may actually be a good idea to continue to pay the property taxes on your home while you purposely do not pay the mortgage. By paying the property taxes you’ll generally keep your local township or city government off your back while you live in your home mortgage-free. If you don’t pay your property taxes then you may end up having two organizations looking to evict you from your home: your mortgage lender and your local government.

Walking away from your home in a strategic default is supposed to be a step that will help you financially and ease some of the stress you may be feeling. It is not always an easy process and it’s not something you want to do quickly and without thought. With a little bit of planning you can continue to live in your home for months or even years without paying the mortgage and you can use that time to get yourself financially prepared for the future. Don’t think of leaving your home as the end of your residence in that house. Instead, think of the process of leaving your home and saving that mortgage money as the beginning of a new and financially sound future for you and your family!