Tens of thousands of American families may remember Christmas of 2009 as the last time they'll spend a holiday in a home they own. Millions of properties have gone into foreclosure since the economic crisis began, and 2010 might not look much prettier.
Congress and the media have paid a lot of attention to those who have lost their homes. Less talked about are the millions of people who keep making their payments every month, even though they really can't afford to. Today, most homeowners are losing big on their investment. Shouldn't more people stop paying their mortgages?
I spoke with several homeowners around the country who haven't skipped any mortgage payments - but are seriously struggling. All of them shared common challenges, but they all have more options than they thought existed.
Deep underwater. These struggling homeowners have mortgage payoff balances that are much higher than the value of their home. Selling their home is simply not an option, since they would have to come up with the difference in cash to settle up with their lender.
Deep in debt. Even though they can't really afford their mortgage payments, many are spending down their savings and relying on credit cards to buy food and other necessities. One homeowner is regularly taking cash advances on credit cards to pay the mortgage.
Part of me really admires their efforts. They feel like they are doing everything possible to honor their commitments to their lenders and stay in their homes. But when they drain savings and accumulate enormous debt, that doesn't seem much better than foreclosure.
Foreclosure is sad, but for those who can easily find a new place to rent for much less, it can be financial liberation. If you are $100,000 underwater and go into foreclosure, your loss is essentially erased. In most cases, the lender can only take the house, not your future earnings. So, the only real financial consequence is that you'll have a tough time getting a loan for almost a decade.
But the truth is that there are much better options than staying in a home you can't afford or going to foreclosure. If you or someone you know is struggling with their mortgage, tell them to call their lender to discuss the options. Here are some of the best ones to consider:
Short sale and deed-in-lieu. If you don't want to stay in your home and can't afford to sell, these are worth thinking about. A short sale is when a lender agrees that you can sell the house for less than the mortgage balance. A deed-in-lieu is when you hand over the property voluntarily, saving the lender the high costs of going through the foreclosure process. You'll still take a hit to your credit score, but a decent real estate lawyer can often limit the impact by negotiating the terms of the agreement carefully.
Loan modification. If you want to keep your home, your best bet might be to modify the loan. The Obama economic rescue package included substantial help for struggling homeowners. The program will allow many homeowners to substantially reduce their monthly payments. Individual lenders also offer their own modification, repayment, and refinance options that are far better alternatives to staying and struggling or going into foreclosure.
Deed-for-lease. Many homeowners might be eligible to hand over their home in exchange for a lease. Instead of a mortgage payment, you'll make a rent payment, which will probably be substantially lower. Again, depending on the terms of the agreement, this might damage your credit, but you'll be able to stay in your home.
While we can all admire the efforts of those who keep paying bills on time, we should be worried about the deep financial hole that millions are digging. Foreclosure may seem like the only way out, there are better options that would allow millions of Americans to take back control of their lives and keep a roof over their head.
Got questions? Direct message me on Twitter (hitchop).
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