Messed Up...need some advice
You guys gave me some excellent advice on a problem tenant that I acted on and am way better off for it. I wanted to get your advice on what my direction should be going now.
My situation is this.
My husband and I bought out first house. We used 30K from the credit line on our first house to put a down payment on and fix up a 2nd house. Both are 5 year arms. (We asked for 30 year fixed on both but the mortgage broker said it wasn’t a good investment choice, so we did what they said. It was a dumb thing to do; we should have stuck to our guns.)
We have since divorced and each took a house. I can’t afford my house by myself. So I have 2 roommates. In 2 years my interest rate will flex and my payment will increase. Even with 2 roommates I don’t anticipate being able to afford the payments once they increase. My house has 254K on it and is probably only valued at 160K right now (according to zillow).
The only other debt I have is my truck (about 10K) and a credit card ( about 8K) from when I was laid off that I can’t seem to pay down. (Had it down to 3K, but then my AC and pool broke, and I had some unexpected medical bills.)
My question is this.
My current plan is to pay off my credit card and my truck so that when 2 years rolls around and my mortgage flexes I will have no other debt beside my house. What else should I be doing? I only make 40K per year, so I know I can’t pay down the balance on my house in time to be able to refinance it or sell it in 2 years time. Otherwise my plan would be to hunker down and pay down my house balance as well.
Thanks, Pam
Times are tough and this post may sound harsh, but I speaketh the truth...
There is no magic here. It is like the ruby slippers - you have had the information all along. Your post lays out a nice plan, let us take it a few steps farther.
Get rid of all other debt. Find places to cut financially. Cable can go away, as can internet service, as can eating out... What else can you cut?
Pay off the debt. Then, start saving for the ARM bump. Get another job if you need to.
You have an opportunity that most others never do - foresight.
This is not a problem if you take SERIOUS steps to solve it now.
For example, why in the world would you pay to fix the pool when you have an economic crisis looming? A pool is a luxury item. You must forego all luxury items until you get yourself back on your financial feet. If you want to 'treat yourself' - buy a candy bar once a week as you head to your second job.
Not harsh at all. That's what I was looking for.
I hope to be able to preserve my credit so I can purchase a rental house again.
I want to make sure I'm on the right track. I'm not a fraid of steady hard work and several room mates. I know I blew it, but i don't want to run away.
I didn't think about the pool that way. I always considered it part of the house maintenance.
Thank you Christian.
You might want to read "Total Money Makeover" by Dave Ramsey.
His advise would go like this:
1) Sell the truck. Buy a clunker.
2) Get rid of everything you can. The things Christian mentioned, though he would go further. Cell phone, everything you possibly can.
3) Save $1000 as your "baby emergency fund". That's what you use to pay medical bills,when that comes up.
4) Put everything else that's left after paying your mortgage, utilities, food and other essentials toward paying of that credit card.
5) Once that's done, save up six months of living expenses. Not income, but living expenses.
6) Now put everything that's left after the essentials toward the house.
By the point where you're dumping as much as you can toward the house payment, you may be able to easily handle the adjustment.
I would call and see if the lender will let you convert to a fixed rate. Keep an eye on the news, as it the stimulus/bailout packages may well do something that would help you out.
This place seemed like a good deal when you bought it. The fact that its underwater is a bummer, but it doesn't change what you paid.
If you really want out, you could try for a short sale. That will have consequences, and could still leave you with a debt to pay off.
We have since divorced and each took a house. I can’t afford my house by myself. So I have 2 roommates. In 2 years my interest rate will flex and my payment will increase. Even with 2 roommates I don’t anticipate being able to afford the payments once they increase.
What do the room-mates pay in rent? Seems to me that a $245,000 loan should be survivable on $40K if the room-mates are paying a fair rate.
Furthermore, you should inquire about a loan modification with your bank. I bet that you could get your rate fixed if you were really persistent. If you attempt a loan mod, I strongly suggest that you do it yourself.
Just my thoughts.
Originally posted by David Peeples:
What do the room-mates pay in rent? Seems to me that a $245,000 loan should be survivable on $40K if the room-mates are paying a fair rate.
It is actually. I can pay for the house and all my expenses on my income. but I can't chunk down my CC or truck with it. I use the room mates $1000 rent (combined) to pay off my debt. My choice in room mates was poor, I got one that was cranking up my AC while I was away and using all my food and supplies, but I didn't do anything about it. That was a lesson learned, instead of a flat rate (utils included) I'm gonna lower the rent slightly and make it include 1/3 of the utilities. When my utility bill is over $500 they're gonna feel it too. Also once rent is late they're outta there. No feeling sorry for them.
Jon, thank you, I will get that book. One place right off the bat that I see I'm doing wrong is not saving money. I put every ounce I have on the cc and then have no emergency fund. Then the med bills come up or repairs are needed and I have to re-use the card.
David, maybe if I just constantly bug the bank, they'll let me convert it. Maybe every couple weeks go in and talk to them? See whats available.
Thank you again for your help & insight.
A weekend job or an evening job could help erase your credit card debt and then add good money to your pocket.
Inventory your skills and abilities and see how you can leverage them.
For instance, my ex cleans houses after work and on weekends. She also sits with the elderly. Guy I know writes resumes for people, another evening or weekend job that earns him $40+/hour.
You sound smart enough to find a lucrative niche for yourself.
Best of luck!
Pam,
I agree with all the advice you've received. $10k loan on a vehicle is too much if money is tight and drain the pool if necessary.
Also, I wouldn't assume that when your loan adjusts that the payment will automatically go up. Last time I checked, base rates are incredibly low right now so once indexed, adjustable mortgages may not be as high as you believe.
Good luck!
Pam, Is the loan a pay option arm? Are your current payments less than the interest? If so, you should be making at least a large enough payment that you cover the interest.
Originally posted by Jon Holdman:
Pam, Is the loan a pay option arm? Are your current payments less than the interest? If so, you should be making at least a large enough payment that you cover the interest.
My minimum payments cover all the interest, but no principal. I usually add $50 to $75 towards principle though. Good point.
Tom, I never thought about the payment going down...maybe rates will stay low? The 1st mtg, which is the one I'm worried about, is at 6.5% until mid 2011. The credit line is flexible & was at 9%, but has decreased down to 4.5%. My total payments went from $1800 to $1550, so that was good. I would like to hurry up and get the cc knocked down so I can get more bang for my buck paying down the 2nd mtg while rates are low.
Thank you again.
From what you say, I'm guessing your first balance at $224,000. And that you've owned it for three years, leaving 27 to go. The IO payment at 6.5% looks like $1213. A fully amortized payment for 27 years would be $1468. So, I'd argue you should be kicking in an extra $250/month to get your payment to where it should be.
That said, I think you're doing the right think knocking out that credit card.
Do consider dumping the truck and buying a clunker. I did that last summer for the one car I had with a note. I had to kick in a grand, but in exchange I'm rid of 36 months of a $400 payment. Cars are more reasonable now that gas isn't $4 a gallon. Plus, a econobox car will get better gas mileage than any truck, reducing your gas bill.
You should look at your loan documents and see what they say about the reset. Even if the interest rate goes down, if they switch from IO to fully amortized, the payment could jump quite a bit.
The 1st mtg, which is the one I'm worried about, is at 6.5% until mid 2011. The credit line is flexible & was at 9%, but has decreased down to 4.5%. My total payments went from $1800 to $1550, so that was good. I would like to hurry up and get the cc knocked down so I can get more bang for my buck paying down the 2nd mtg while rates are low.
You are miles ahead of most Americans, just stick with it. However, I would still pressure the bank to fix your rates, you never know what will happen in the future...
Since you have 2 yrs to pay down that note, you may also want to look at cheap improvements you can make to the house over the next 2 yrs that will increase its value. You may just be able to increase the value enough at that point in order to refi into a fix rate.
I would suggest to contact your lender and see if they could work with you on modifying the terms of your loan. It could be long process but this is where I would start.
Originally posted by Jon Holdman:
You should look at your loan documents and see what they say about the reset. Even if the interest rate goes down, if they switch from IO to fully amortized, the payment could jump quite a bit.
I didn't think about that either. Good point. I'll check that out. So, you think I should put an extra $250 on the 2nd mtg payment? I was thiking I'd get my card paid off and put a full $1000 on it on top of the minimun payment. I think I can have the card paid off in 6-8 months provided no major house expenses.
I'm going to go to Washington Mutual on Monday and see where they stand.
I looked up what my truck is worth on Kelley Blue book. I think I'm stuck with that bad boy. It only bluebooked at $6K and I have over $10K on it. The payment is $250 and to fully insure it is $42 per month. (Yeay Progressive. State Farm was charging me $105 per month. I just switched. I think I'm gonna put my houses under them too. I never have any claims and if its a lot less it could reduce my payments as well.)
I'm also gonna go look for that book you suggested this weekend Jon.
Thank you all.
Ouch on the truck! Just shows why cars are such a bad deal. I'm just going to start using my Heros flying ability to get around and give up on this car thing!
I think you're doing the right thing by getting rid of the credit card debt.
First, save up that $1000 "baby emergency fund". That will let you avoid dipping into the credit when one of lifes inevitable bumps comes along. Pay the minimum on everything until you have that. If you need to use some of it, drop back to minimum payments until its replenished.
Then, pay only the minimum on the house and truck, and put every penny you can scrape together toward the card.
Once that's paid off, keep at the minimums on the house and put everything toward the truck.
At this point, Ramsey's advice would be to build up your true emergency fund which is six months expenses.
Then, start dumping everything onto the second mortgage.
I would start talking to the lenders about getting your loan converted to some reasonable, locked in fixed rate loan.
Use caution if there is any principle reduction. I'm not exactly sure about the situation, but it seems like you must have done a refi or HELOC and took some cash out of this property. If that's right, its more difficult to avoid the phantom tax on forgiven debt. That might still be the right thing to do, if you can get them to accept that. But be aware of the tax consequences. A good CPA would be helpful if you get to that point.
I might have to give Progressive a call. That's quite a difference.
I have to agree that you should also start pressuring your bank to fix your rates. If you explain the situation that COULD occur if your rates go up the bank will listen, with so many places going into foreclosure and banks non-performing assets growing higher every day regulators are coming down hard on banks that don't take preventative action to minimize their non-performing assets. This is a plus for you because if you can fix your payment at a rate that you can work with you reduce the possibility of going down the foreclosure route which will keep the bank happy.
You mentioned above that you would try every couple of weeks... I would be more annoying than that. Call up the bank every day or every other day. If you have the fortitude to stick with it they will eventually cave because they are tried of getting calls from you. :) :P
Hi Pam,
I made a similar post like this months ago, DEFINATELY read the Dave Ramsey book, it changed my life. That's really all the advice you need.
Good luck to you, you'll be OK. You are willing to work to fix your problem.
Heather
PS: You may qualify for your bank to lower your interest rate based on hardship. It's worth a shot, what do you have to lose?
I'll have to second David - do what you can to get a loan modification. They may want you to fill out a bunch of paperwork, but if you see it through there's a decent possibilty they may modify the loan, especially in the LTV you are at. If you make it make sense to the bank, they would rather modify than anything else. Especially without principal reduction. Only you will continue to be upside down in the house, because it's your house. They know that, and they will very likely modify your terms if you push the issue.
Originally posted by Jon Holdman:
Ouch on the truck! Just shows why cars are such a bad deal. I'm just going to start using my Heros flying ability to get around and give up on this car thing!
Another good idea! Why didn't I think of that! ;)
I purchased Dave Ramsey's book this weekend. Good stuff.
Thank you Minna, Heather and Bob. I heard a story, one of those friend of a friend type things. The guy in California went into the bank, he was all sorts of upside down in his loan. He told them that he was currently making the payments but that it wouldn't last. He said they eded up reducing his principle and fixing the loan at a really good rate.
I would be ecstatic to have the loan converted to a fixed rate! I have new hope now. I had been told before that unless I make a late payment they wouldn't even talk to me. My neighbor even went as far as to stop making payments, kept the money in an account, and got then to convert the loan that way claiming hardship. He did actually lose his job but was doing side work and was still able to make the payments.
Thank you everyone for your input and knowledge. I will learn from this one for sure.
Thanks again.
Pam