People always ask me: Is there any way to lower the principal on my mortgage? The answer is yes and no. Confused? That’s ok – you are just one of millions of homeowners who aren’t clear on what their rights are as homeowners. While the best way to deal with falling behind on your monthly mortgage payments is to modify your mortgage loan, there are other ways to save on your monthly payments.
Let’s take Joe the Plumber as our first example. Joe has a $2,500 monthly mortgage payment. Recently, however, Joe has been falling behind due to one of many reasons that have befallen us during this dire economy. Seemingly without warning, Joe misses his first payment. He then misses another payment. Judiciously, he seeks help and is able to work out a modification that will lower his monthly payment to $1,750 a month and wipe out his arrearages. You might think Joe is lucky. I would say Joe isn’t lucky, rather he is proactive. He understood his situation early, sought help and realized banks are more than willing to keep folks in their homes.
Now let’s take Jane the Occupational Therapist. Jane also has a $2,500 monthly mortgage payment. She too has fallen on hard times. Unfortunately, Jane is not as diligent as Joe and she waits 5 months before she seeks help, only after getting a notice of foreclosure from big bad bank’s attorneys. She too is able to work out a loan modification that will lower her payments to $1,750 and wipe arrearages. Wait! It seems waiting is the key. Not only did Jane save $7,500 more than Joe by not making three payments, she got to sit there and do nothing for 3 additional months?! Did I forget to mention that there was a foreclosure action on her? Did I also forget to mention that the banks were unwilling to speak to her because she was 5 months late and in foreclosure already? How much did she spend to not only get the modification but also fight the foreclosure action? Jane might not have been ahead of Joe after all!
Now let’s take Jack the Ripper. Like Joe and Jane, Jack also has a $2,500 monthly mortgage payment and has fallen on difficult times. Jack is so down on himself, he waits 9 months to seek help only after the bank’s attorneys send him a notice of sale. Jack is up in arms. He doesn’t want to lose his home, but he is 9 months behind, surely there is no remedy for Jack situation!? Luckily Jack calls his attorney, who tells him he has options up until the property is sold (and sometimes even immediately after). Bankruptcy! Bankruptcy? How is that going to help? Well, when you file a Chapter 13 the court issues an order (called the Order for Relief) that includes something not well-known – the “automatic stay.” The automatic stay directs your creditors to cease their collection activities immediately, no excuses. If your home is scheduled for a foreclosure sale, the sale will be legally postponed while the bankruptcy is pending–typically for three to four months. Oh and by the way, this will help protect against other creditors too. However, there are exceptions to this general rule that I will mention in a parenthetical but not get into now (lender can file a motion to lift the stay). Chapter 13 bankruptcy lets you pay off the “arrearage” over the length of a repayment plan you propose–five years in some cases. But you’ll need enough income to at least meet your current mortgage payment at the same time you’re paying off the arrearage. Assuming you make all the required payments up to the end of the repayment plan, you’ll avoid foreclosure and keep your home. But wait there’s more: Chapter 13 may also help you eliminate the payments on your second or third mortgage too. If your first mortgage principal is greater than the value of your home, you may no longer have any equity with which to secure the later mortgages. That allows the Chapter 13 court to “strip off” the second and third mortgages and recategorize them as unsecured debt–which, under Chapter 13, takes last priority and assuming you stick to your repayment plan may not have to be paid back at all. Jack is sure one lucky guy! But did I mention that bankruptcies stay on your credit report for years! And did I mention all the fees fees Jack racked up filing for bankruptcy?
So what’s the moral of the story? First, don’t sit on your hands. Being proactive is essential to successfully dealing with bad situations. Call an attorney with experience in all facets of home retention. A good attorney will know what to do in every situation. Loan modification might be the best remedy, but not in all cases. Lowering principal balances on 2nd and 3rd mortgages might be the best remedy, but not in all cases. Ask questions, get answers and most importantly, be proactive.