Q: I co-owned a home with my mother, who passed away about seven years ago. She had put my name on title before she died, but didn’t really tell me anything about the mortgage situation except that I needed to pay the bank X number of dollars per month. I didn’t realize that the mortgage would adjust. It did adjust, though, and the payment increased — and around the same time, I lost my job.
A friend connected me with a hard-money lender, who bailed me out of that really bad loan for a year until I was able to refinance it with a regular mortgage lender. He also gave me about $50,000 I used to fix up the place.
After the refi, though, I ended up with a loan that has a three-year prepayment penalty, and I’ve almost done two years of that. I’m struggling to make the payment, because my employer just went out of business. The lender did give me a three-month trial loan modification, which reduced my payments and is helping me get through this tough time. I am hoping to refinance my loan next year, assuming I have a new job by then, because the interest rate is pretty high.
I’m so weary of feeling stressed about the payment on my home — especially knowing that this house was once owned free and clear by my mom, but I’m ready to learn from my past mistakes. What did I do wrong?
A: Well, perhaps the overarching error, if you will, is being too hard on yourself. You were originally put in a tough spot at an emotionally trying time, through no real fault of your own. But I do think there are a number of potential mini-cautionary tales in your story that other folks can benefit from, so let’s go ahead and go down the list.
First off, at the time your Mom put your name on the property, in anticipation of passing away, you missed a great opportunity to fully educate yourself about the mortgage obligation that would soon become yours. Every homeowner should know the basics of their mortgage at a minimum, including (but certainly not limited to):
- The type of loan (fixed or adjustable)
- The term of the loan (e.g., 15-year, 30-year, 40-year)
- The interest rate
- The loan balance and payment, and
- If adjustable, when the adjustment(s) will occur, and how they will affect the interest rate and payment. …CONTINUED
In fact, your mother’s decision to place your name on the home as a co-owner was essentially an estate planning strategy. Undoubtedly this saved you some headaches, but a little deeper estate planning would have saved you even more. Had you two had a conversation and done the research to get you educated about the mortgage, it might have occurred to you both to consider obtaining life insurance coverage that would pay the mortgage off at the time of her death. Overall, insufficient estate planning for and by your mother might have been the start of your problems.
Another glitch in your past course of action was using that $50,000 for repairs at a time when your job prospects or industry seem to be shaky. Some would say you should not have increased the indebtedness on the home at all. I would say that if you were going to do that, you should definitely have ensured a pretty major cash cushion from which you could make the mortgage payment if you had any sort of job drama in the future, like what you’re going through right now, before spending it on repairs. No good having a nicely updated home if you can’t make the mortgage payment, right?!
Also, on the matter of your loan types, mortgages with prepayment penalties (as you now know) are definitely advisable to avoid altogether, although they were a popular feature of the subprime mortgages of a couple of years ago, and you might not have been able to find a loan without a prepay penalty at that time. Unfortunately, studies now show that in the height of the subprime era, women were nearly 40 percent more likely to be given a subprime mortgage than men.
Other studies have shown that, often, subprime borrowers were actually qualified to obtain "regular" loans, with low interest rates and without adjustable rates and payments. Given that one of every five subprime loans is projected to end in foreclosure, the lesson there was to be very aggressive about finding a loan without a prepay penalty, as many women accept the first mortgage they are offered, erroneously assuming that it is the best they can get.
Frankly, high-interest, short-term, hard-money loans are another type of mortgage to avoid, but it sounds like it might have worked out for you — in the short term. Perhaps you were connected with a more scrupulous hard-money lender through your friend. What you did right in that situation was finding your hard-money bailout lender via referral.
The ray of hope I see in your situation is that your lender has extended you a temporary modification. Most often, borrowers who are granted temporary modifications and make the modified payment on time for the full three months are granted some type of permanent modification — often resulting in a fixed-rate, fixed-payment loan either permanently or for a long period of time.
Comply with the temporary modification, and at the end, ask your lender for a long-term, fixed-rate mortgage, and you might end up improving your situation without the drama and costs of qualifying for a refinance with a shaky job history.
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.
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