Creative Ways to Lower Your House Payment!

Allison Gervais

I have spoken with countless people who are having a difficult time making their mortgage payments.  Most often it is due to a job layoff or divorce. 

by Allison Gervais Sofnas
Sr. Mortgage Loan Consultant

There is Just Less Money to Pay the Bills

Many self-employed homeowners are making less money the past few years due to the economy.  Money is a big factor with relationship issues and many couples are separating or divorcing. This causes an increase in living expenses due to securing a second home or rental for the spouse moving out. 

The bills become less affordable with the biggest one being the mortgage.  If a refinance can be secured, there are several options for lowering payments with either an adjustable or fixed rate mortgage, especially since rates are still at all time lows.

It’s Time to Get Creative!

So what do homeowners do when they cannot afford the mortgage payments any longer, can’t qualify to refinance and don’t want to sell their house?  It’s time to get creative and find an investor for your house. 

I spoke with a client recently who owns a condo worth $700,000, owes $500,000 and cannot qualify to refinance.  If she could lower the amount owed to $417,000 or less, she would qualify.  She is cash poor and doesn’t have the extra $83,000 to lower the loan amount down to $417,000. (the conforming loan maximum where she could secure a lower interest rate) 

Why not Find an Investor to Help? 

An investor could put in $100,000 in cash, thus allowing her to refinance the mortgage into a conforming loan with lower payments.  She agrees to split the equity with the investor when the market rebounds and she sells or refinances her mortgage down the road.  It’s a win-win situation for both of them. 

This creative investment situation happens most often with relatives as the investor.  Many parents plan to pass on their wealth but are not in a position where they can simply gift the money now. 

Let’s say the existing mortgage on the example noted above of $500,000 is at a rate of 5.5% with a payment of $2839 per month.  If you decrease the balance to $400,000 and lower the rate to 4.875% 30 year fixed, your new mortgage payment would be $722 less per month. 

If you opted for an adjustable fixed for seven years, you could save even more.  This could be the difference between being able to hold onto a property you otherwise were struggling to afford.

What’s in It for the Investor?

What’s in it for Mom and Dad?  (Or whoever else invests in your property)  If the property increases back up in value to $900,000 at a 5% annual increase, by the year 2017, their initial investment has doubled, thus earning a return of approximately 10% per year.  This is much better than leaving it their bank account or a low interest CD and they got to help out at the same time.   

When they are bought out, there will be capital gains taxes but do the math, it still works out in their favor and you benefited from being able to keep the property at a much lower payment for those 7 years. 

What if the market doesn’t come back around and stays flat?  Your investor still gets their money back and to sweeten the deal you could always add in a minimum gain to their commitment, thus decreasing your equity if the market remained flat or declined.

To see if a situation like this can work for you, contact your mortgage broker and a licensed EA or CPA (to discuss the tax consequences) as a first step.

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Tags: family, Home, Money, wealth

Category: Real Estate