Sub-prime mortgages, interest-only mortgages and adjustable-rate mortgages have all been implicated in the current mortgage meltdown. There is a class of homeowner, however, that is still making payments on a mortgage and hasn't yet fallen behind on the payments, but may still be looking for a way to lower monthly payments.
Homeowners looking for a way to hang onto a home whose payments are too high have focused on loan modification, but homeowners who aren't in trouble on paper are also looking for loan modifications to reduce monthly payments or avoid problems that may be looming.
In many cases, the problem isn't the monthly payment at all. Instead, property values have dropped thanks to local foreclosures, a sagging real estate market and the soaring number of properties available for sale. Homeowners may find themselves making payment on homes whose values have sunk by 20 or 30 percent. In some markets, the decline in property value has been even more severe.
Homeowners can't seen making payments on a property in which they have little or no equity, or have little chance of recovering the property's value in the foreseeable future. In a normal market, a homeowner could refinance to get a better interest rate, or lower monthly payment. With the decline in value, refinances for many homeowners are all but impossible, leaving the homeowner to pay more than the property is worth, or to turn the property back over to the bank.
The Homeowner Affordability and Stability Plan (HASP), introduced last week, may offer some new hope for homeowners who are in a similar situation. Sheila Bair, Chairman of the FDIC said last week that voluntary loan modification options hadn't worked, in part, because mortgage lenders are reluctant to risk being sued by investors who bought securitized mortgages as an investment.
HASP reduces mortgage payments to 38 percent of a homeowner's monthly income, and is available for homeowners whose loans are guaranteed by Fannie Mae or Freddie Mac. Bair counsels homeowners who have previously been turned down on a refinance to check with their mortgage lender again. Final details of the HASP plan will be released to the public on March 4. Until that time, many of the nation's largest mortgage lenders have agreed to a moratorium on foreclosures.
Monday, February 23, 2009
Tuesday, February 17, 2009
Some Consumers Look To Their 401(k) Funds For Debt Relief
At one time, consumers would have turned to the equity in their homes to help them out of a financial pinch. Today, that route has been closed for many borrowers who are no longer eligible for home equity lines of credit (HELOC), or whose existing HELOCs have been cut or withdrawn altogether. Fewer consumers – even those with good credit – are eligible for personal loans, and many consumers don't have sufficient savings to cover them in the event of an emergency.
These circumstances combine to make a 401(k) loan attractive to some consumers. On one hand, some financial advisors will say that when you borrow from your 401(k) plan, you're borrowing from yourself. The tactic is safe, they say, because you are repaying the loan with interest, so your retirement funds are still working even though you're putting them to use elsewhere. This explanation simplifies the rationale for borrowing from your retirement fund, but it doesn't do a good job of explaining the risks associated with such a loan. And the risks are plenty.
There are a few rules about borrowing from your 401(k) plan, but each plan may have additional borrowing rules. Typically, a loan from your 401(k) plan will be limited to 50% of your vested balance up to $50,000, depending upon your plan. Your plan will likely offer a low interest rate. Here's the catch: you could get a better interest rate and more stable loan terms by borrowing from a traditional lender, and your retirement funds have the potential of doing better in investments than with the low interest rate you'll pay on your loan.
Withdrawals from your 401(k) plan should be considered very carefully. Your ability to borrow from your employer-sponsored 401(k) plan is based on your employment. If you are fired or laid off from your job, you must repay any outstanding loans within 90 days of the date of separation. If you don't repay the loan, the loan will automatically convert to an ineligible withdrawal, and you'll be assessed income taxes on the amount of the loan plus a 10% penalty.
The risk here cannot be understated. If you're borrowing from your retirement funds, chances are good that you don't have the cash on hand to repay the loan. If you need to repay the loan in a hurry – as in the case of a job loss – you'll have a difficult time convincing a lender to refinance your retirement loan if you don't have a job. Further, your tax bill may become catastrophic (at a time when you really need your cash) if your 401(k) loan converts to an ineligible withdrawal, complete with taxes and penalties.
Some creditors may mislead you or may pressure you to withdraw retirement funds to pay your bills. Generally, retirement funds are protected in bankruptcy proceedings, so you should not consider them a ready source of cash to tap in a financial emergency. If your credit card debts or other obligations are causing you to consider a loan from your 401(k) funds, look for other options, including debt settlement to relieve the financial stress you may be experiencing.
These circumstances combine to make a 401(k) loan attractive to some consumers. On one hand, some financial advisors will say that when you borrow from your 401(k) plan, you're borrowing from yourself. The tactic is safe, they say, because you are repaying the loan with interest, so your retirement funds are still working even though you're putting them to use elsewhere. This explanation simplifies the rationale for borrowing from your retirement fund, but it doesn't do a good job of explaining the risks associated with such a loan. And the risks are plenty.
There are a few rules about borrowing from your 401(k) plan, but each plan may have additional borrowing rules. Typically, a loan from your 401(k) plan will be limited to 50% of your vested balance up to $50,000, depending upon your plan. Your plan will likely offer a low interest rate. Here's the catch: you could get a better interest rate and more stable loan terms by borrowing from a traditional lender, and your retirement funds have the potential of doing better in investments than with the low interest rate you'll pay on your loan.
Withdrawals from your 401(k) plan should be considered very carefully. Your ability to borrow from your employer-sponsored 401(k) plan is based on your employment. If you are fired or laid off from your job, you must repay any outstanding loans within 90 days of the date of separation. If you don't repay the loan, the loan will automatically convert to an ineligible withdrawal, and you'll be assessed income taxes on the amount of the loan plus a 10% penalty.
The risk here cannot be understated. If you're borrowing from your retirement funds, chances are good that you don't have the cash on hand to repay the loan. If you need to repay the loan in a hurry – as in the case of a job loss – you'll have a difficult time convincing a lender to refinance your retirement loan if you don't have a job. Further, your tax bill may become catastrophic (at a time when you really need your cash) if your 401(k) loan converts to an ineligible withdrawal, complete with taxes and penalties.
Some creditors may mislead you or may pressure you to withdraw retirement funds to pay your bills. Generally, retirement funds are protected in bankruptcy proceedings, so you should not consider them a ready source of cash to tap in a financial emergency. If your credit card debts or other obligations are causing you to consider a loan from your 401(k) funds, look for other options, including debt settlement to relieve the financial stress you may be experiencing.
Tuesday, February 10, 2009
What Do You Need For Loan Modification?
Loan modifications can and do work, but their success depends upon the terms of the modification and how well the new agreement addresses the borrower's problems. For some borrowers, modifications end up costing more money out-of-pocket or over the long run than the original mortgage did. Rather than helping a borrower, these modifications often make the borrower's situation worse and, in some cases, guarantee that the borrower will lose the home.
Before seeking a loan modification, a borrower should understand why the current loan terms aren't working. The monthly payment could be too high for the borrower's current income level. In this case, the borrower should be seeking modifications that lower the monthly payment. Modifications that will lower the borrower's monthly payment include those that lengthen the term of the mortgage, reduce the interest rate on the remaining balance or reduce the balance due. Some modifications will combine these elements. If the end result of a loan modification isn't a lower monthly payment, the loan modification should be refused.
In other cases, the problem is that the value of the property has declined, and the borrower owes significantly more on the property than its current market value. In this case, the goal of the modification is to "right" the loan. The best way to bring the loan in line with the real value of the property is for the lender to forgive some of the remaining balance due.
This approach may not be the lender's first choice, but forgiving some portion of the principal owed is usually less expensive than a foreclosure and resale. An added incentive for borrowers to accept this kind of modification comes in the form of a tax break. Usually, forgiven debt is considered income for tax purposes. In 2009, forgiven mortgage debt (only) is exempt from income tax.
Still other borrowers are seeking to modify the terms of their loans to prevent adjustable rate mortgages from rising, to avoid a balloon payment, or to catch up on missed payments. Normal refinancing options may be unavailable due to new lending eligibility guidelines or a borrower's reduced equity. For these borrowers, simple loan modifications can address each of these issues, provided that the borrower can work his or her way through the lender's modification process.
If you would like to explore loan modification, but your lender is not responding, you're not alone. Many lenders have been inundated with loan modification requests. Consider working with a third party to negotiate a loan modification on your behalf. Working with a reputable loan modification firm that represents your interest and understands the process of loan modification can get you the terms you need when you need it.
Before seeking a loan modification, a borrower should understand why the current loan terms aren't working. The monthly payment could be too high for the borrower's current income level. In this case, the borrower should be seeking modifications that lower the monthly payment. Modifications that will lower the borrower's monthly payment include those that lengthen the term of the mortgage, reduce the interest rate on the remaining balance or reduce the balance due. Some modifications will combine these elements. If the end result of a loan modification isn't a lower monthly payment, the loan modification should be refused.
In other cases, the problem is that the value of the property has declined, and the borrower owes significantly more on the property than its current market value. In this case, the goal of the modification is to "right" the loan. The best way to bring the loan in line with the real value of the property is for the lender to forgive some of the remaining balance due.
This approach may not be the lender's first choice, but forgiving some portion of the principal owed is usually less expensive than a foreclosure and resale. An added incentive for borrowers to accept this kind of modification comes in the form of a tax break. Usually, forgiven debt is considered income for tax purposes. In 2009, forgiven mortgage debt (only) is exempt from income tax.
Still other borrowers are seeking to modify the terms of their loans to prevent adjustable rate mortgages from rising, to avoid a balloon payment, or to catch up on missed payments. Normal refinancing options may be unavailable due to new lending eligibility guidelines or a borrower's reduced equity. For these borrowers, simple loan modifications can address each of these issues, provided that the borrower can work his or her way through the lender's modification process.
If you would like to explore loan modification, but your lender is not responding, you're not alone. Many lenders have been inundated with loan modification requests. Consider working with a third party to negotiate a loan modification on your behalf. Working with a reputable loan modification firm that represents your interest and understands the process of loan modification can get you the terms you need when you need it.
Monday, February 2, 2009
Short Sale Tax Break To End In 2010
For homeowners who are facing possible foreclosure, one option includes a short sale with loan forgiveness. Homeowners use this approach when they want to avoid foreclosure, but can’t sell the home the mortgage exceeds the home’s current value. The mortgagor agrees to accept the sale price of the home as full payment for the mortgage and forgives the remaining balance.
Under ordinary circumstances, the Internal Revenue Service would consider the amount of the loan forgiveness taxable income. Under the Mortgage Forgiveness Debt Relief Act, signed in December 2007, the loan forgiveness can be tax-free if the homeowner meets certain criteria.
To qualify for the federal tax-free benefit, the home being sold must be the seller’s primary residence, the debt forgiven must be mortgage debt (as opposed to home equity financing) and the sale of the home must have taken place between January 1, 2007 and December 31, 2009.
On January 1, 2010, without further action by the Congress, the tax-free benefits that are currently extended to homeowners who conduct short sales will expire. The law was originally intended to provide relief to homeowners who are facing bankruptcy and foreclosure. There has been no discussion early in this legislative session with regard to re-authorizing the relief. Depending upon the status of the economic recovery, Congress could quickly reauthorize the relief later in the legislative session.
For 2009, however, short sales that include loan forgiveness will continue to be a viable option for homeowners who are seeking to avoid bankruptcy.
Under ordinary circumstances, the Internal Revenue Service would consider the amount of the loan forgiveness taxable income. Under the Mortgage Forgiveness Debt Relief Act, signed in December 2007, the loan forgiveness can be tax-free if the homeowner meets certain criteria.
To qualify for the federal tax-free benefit, the home being sold must be the seller’s primary residence, the debt forgiven must be mortgage debt (as opposed to home equity financing) and the sale of the home must have taken place between January 1, 2007 and December 31, 2009.
On January 1, 2010, without further action by the Congress, the tax-free benefits that are currently extended to homeowners who conduct short sales will expire. The law was originally intended to provide relief to homeowners who are facing bankruptcy and foreclosure. There has been no discussion early in this legislative session with regard to re-authorizing the relief. Depending upon the status of the economic recovery, Congress could quickly reauthorize the relief later in the legislative session.
For 2009, however, short sales that include loan forgiveness will continue to be a viable option for homeowners who are seeking to avoid bankruptcy.
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