A for sale sign stands in front of a bank-owned home in Las Vegas on Feb. 8, 2008.
(Photo: Jae C. Hong, AP)
Money Watch, a personal finance column that runs every Saturday, features a financial planner from the National Association of Personal Financial Advisors answering reader questions about saving, protecting and growing your money. To submit a question, e-mail USA TODAY personal finance reporter Christine Dugas at: email@example.com.
Q: I bought my house in February 2007 for $362,000. It is now worth $150,000. The loan is interest only. I've tried to get another loan at a lower interest rate, but no bank will help me. Should I walk away or stay? I am on time with my payments, and I don't have any other financial problems. . Please help me.
A: This is a very difficult situation. You don't indicate if you paid anything down when you purchased the home. If you did, then the "walk-away" option also includes the loss of that down payment. Clearly, because of the loan/value ratio, no lender will ever help you unless there is some other collateral available.
Your question also implies that the interest-only loan you now have is at a high percentage rate. And, if your interest-only loan has a floating rate clause or a balloon date when it must be repaid, you could have even more trouble down the road. So here are some things to consider:
Is the decline in the home value realistic or caused by other factors that could eventually improve? If you stayed in the home for another three or four years, might the value recover? Or was the original price so unrealistic that there is no hope that the home value will rebound in the next five years? If the value won't come back, then walking away may be your only option.
If you decide to walk away, be prepared for a seriously negative hit to your credit rating. But before you pack up and leave, consider the federal mortgage programs.
If you are not behind on mortgage payments but have been unable to get traditional refinancing because the value of your home has declined, you may be eligible to refinance through the federal Home Affordable Refinance Program (HARP). HARP is designed to help you get a new, more affordable, more stable mortgage.
If you're behind in your mortgage payments, in the foreclosure process, or current on your payments but are about to default due to a recently experienced hardship, you may be able to modify your loan to a lower rate through the federal Home Affordable Modification Program (HAMP), part of the federal Making Home Affordable Program.
If you are not eligible for one of the federal programs, contact the lender to open a discussion about alternatives. With a deed in lieu of foreclosure you would give the property's deed to the lender in exchange for the lender canceling the loan. It prevents foreclosure, but after the home is sold, the lender may not forgive any loss in the mortgage balance.
Some lenders prefer a short sale, in which you would continue to be the owner and responsible for selling it. After the property is sold, the lender would forgive the balance of the loan that remains unpaid.
But with a deed in lieu or short sale there may be tax consequences based on the forgiven debt.
Unfortunately, the difference between your original loan and today's value makes for a very unpalatable situation. What is clear is that everyone... the lender and you... are going to take a bath. The only thing that remains to be seen is what effect it will have on your credit report. A negotiated way out is always better than a forced foreclosure.
Craig E. Carnick, NAPFA-Registered Financial Advisor
Carnick & Company, Colorado Springs, Colo.
Craig E. Carnick, USA TODAY