It's been a tough couple of weeks for the stock market, and a big reason for that has been the steady decline of the real estate industry. As interest rates rise and home sales fall, a growing number of Americans stuck in the housing market bubble are left wondering what they should do next. TODAY real estate guru Barbara Corcoran offers advice for anxious homeowners:
Variable interest rates, the once-booming housing market, and easier-than-ever-to-get mortgages have put a lot of homeowners in a very difficult spot: trapped in a home they can no longer afford but can’t afford to sell.
More than a fifth of subprime loans were past due at the end of June, up from 13.4% a year ago. Worse still, more borrowers with good credit are now falling behind on their loans; the nation’s largest mortgage lender has announced that about 5.4% of home equity loans to customers with good credit were past due at the end of June, up from 2.2% last year.
For many people, the last payment they’re willing to miss is their house payment. So when someone is making late or no payments on their home, you know that they are in serious financial trouble. I don’t think people realize that they have lots of options that they can take advantage of. If you move early enough, you can avoid finding yourself in dire straits. There are legitimate reasons for falling behind, but there are also legitimate avenues to take that can get you through a financial rough spot. Here are some options open to you:
Refinance your mortgage
For most people, the problem isn’t how much they owe over the long term, but rather how big their monthly payment is. If you can get that payment down, it will instantly make things much more manageable. Talk to your bank or mortgage lender, renegotiate the terms of your deal and refinance your home. In some cases, you can cut your monthly payments in half.
Rent your house
The advantage to this is that a lot of people are living in a house that is bigger than what they need. If they rent out their home, they can generate a new source of income, rent something smaller and cheaper, and use the difference to pay off their bills. This is a particularly good option for older people in a home that used to have children in it, but now has a lot of extra unneeded space.
How do you do this? First of all, find out what rent you can get and if the rent will cover the mortgage. Make sure you know any condo or town restrictions against renting. When you find a potential tenant, find the tenant’s landlord references and credit report, prepare and sign a lease and, if your house was built before 1978, give a lead-paint disclosure to your tenant. One caveat to keep in mind: You’ll lose your tax-free personal residency exclusion, but you’ll qualify for a 1051 exchange.
Get a reverse mortgage
A reverse mortgage enables older homeowners to convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment. The reverse mortgage is aptly named because the payment stream is “reversed.” Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to you.
This can be a complicated idea, but it’s a very good option that a lot of people, especially older couples, fail to consider. Basically, the bank advances you a portion of equity in your house. The bank can deduct whatever amount you have left on your mortgage from that equity, and then they can pay you out the rest of the equity, in cash, over a certain number of years. You will get a check every month for a certain amount of money and have money to spend; you won’t be paying for your home, and you’ll still be living there. People are sometimes afraid of this option, because they are afraid of outliving their reverse mortgage and then they miss out on some of their money. But that rarely happens. You can dictate how many years you want to be paid.
Negotiate with your bank
This is an easier option than most people think. When people can’t make their mortgage payments and are in danger of foreclosure, they think that they have no leverage to negotiate with their bank. However, if banks don’t negotiate, they have to package your bad note, then they pass that off to a vulture fund that ends up selling the home at a discount. The bank has an interest in keeping their portfolio OK, so they will want to negotiate with you to prevent foreclosure.
One mistake that people make when they try to do this is they try talking to the creditor from the bank who is calling them about late mortgage payments. That’s the wrong person; they won’t do anything for you. You want to speak to the settlement department, and if you’re in default, you want to call the bank’s workout department.
Don’t panic and act early and you can make this work for you. Also, the poorer you are, the bigger the discount you can negotiate. This is one area where it might actually help to be poorer.
Have a 4-hour sale
If all you really want to do is sell your home and move on, this could be a radical option for you. This was suggested to me by a broker who e-mailed me. Here’s what she had to say: “Underprice the house, make it look clean and tidy, advertise an open house for 4 hours. Have bid packets ready and ask for sealed bids within 48 hours. I did this and had 38 people appear. We had bids that were all over the place and accepted one that was 30% above ask.”
The advantage to this is that you will get everyone interested in that size and location in those four hours, and it will put pressure on them to bid if they are even remotely interested. You can do this yourself, but you should probably have a broker help you run it. The downside to this: You have to have a seller who really believes that if you get a crowd, you will get a decent price. Sometimes the idea of doing this can scare a lot of sellers.