Unraveling Money – My Exploration of Personal Finance and Productivity

May 27, 2009

Modifying, refinancing or deferring mortgages

Filed under: Mortgage — unravelingmoney @ 5:34 am

I don’t have the greatest mortgage. I also don’t have the worst – my main interest rate is 6.375% and it is a 7-year-ARM, which adjusts only once a year after that. The intention, the pipe dream – is to refinance at a still-low-rate once I have paid off my second mortgage of $60,000. Problem is, $60,000 is a lot of money, a lot of money I unsurprisingly don’t have. As far as I know, I’m unable to refinance my home until I have 20% equity in the property. Right now I have 10% or so.

These are all things I wish I had considered more seriously before signing my life away.

It’s not all bad, of course – I make a good living (crossing fingers it stays that way) and I live in a very nice condo in San Francisco that I can basically afford, although I’m not actually gaining a lot of equity at present, and I have to watch my spending very, very carefully.

Strangely enough, my lender, Union Bank of California, did not accept any TARP funds from the Federal government. Because of this, they are not forced to participate in any loan modification programs such as http://makinghomeaffordable.gov/eligibility.html – but they intend to offer a similar program to homeowners in the next few months, according to the “Loss Mitigation Specialist” I spoke to today.

Side-note – interestingly, it turns out that loan modifications are much more beneficial for banks in the long-run over foreclosures. There was a great piece on This American Life recently – http://thisamericanlife.com/Radio_Episode.aspx?sched=1296.

Even though Union Bank isn’t currently doing loan modifications, they do have plans in place to help struggling homeowners. They will defer mortgage payments for a certain number of months, and then tack those mortgage payments on to the end of the life of the loan.

I am intrigued. There must be a catch. No such thing as money for nothing, right?

However, think of the benefits. By deferring my mortgage payments, I could use the money I would normally spend on my mortage to pay down my credit card debt significantly. This would allow me some breathing room to get my finances in order, set up my savings plan and my debt principal repayment plan as well (you can always pre-pay your mortgage principal separately if you like).

So, I am investigating this and asking the following questions of the bank:

1. Are there any negative repercussions to my FICO score or to the interest rate(s) of my loans at any point in the process?
2. Is there a lump sum payment due at any point after the deferral?
3. Are there any other hidden costs or negatives that I’m missing?
4. What is the maximum deferral period allowed? Any minimum?
5. Will taking part in this program affect my chances of being eligible for a loan modification or refinance later on in the life of the loan?
6. What are my chances of being approved? I haven’t missed any payments on my loan yet, nor do I want to.

I will update this blog with the answers once I receive them, more to come.

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