It wasn't all that long ago that we all were dealing with the unfortunate experience of having an asset that was underwater, meaning the value of the asset was less that what was owed on the loan attached to the asset. This can happen to a car, boat, RV, and most commonly, your home.
Home values have experienced a significant increase since the great recession twelve years ago, thus making homeowners pretty satisfied with their purchases. This appreciation of value has also given way to some homeowners using their equity to make large purchases, home improvements, or debt consolidation. This is often done through what mortgage lenders call a cash-out refinance, where you refinance your first mortgage into a larger loan and receive the difference in a cash payment to you.
However, other homeowners choose the lower cost option of a home equity loan or line of credit. These loans are typically junior mortgage liens on your home, sometime referred to as a second, or second mortgage. What this really is referring to is the position in line the loan has in case you default. If you were, the first mortgage would be paid first, and you guessed it, the second mortgage would be paid second.
With the substantial detrimental affects the pandemic shutdown has caused, home prices may, for the first time in nearly a decade, start to turn downward. While the cause and likelihood of this happening is outside the scope of this article, you should nonetheless be prepared should it happen and affect you personally.
There are many solutions to dealing with a home that has mortgage liens that exceed the value of the home. But they are only going to be relevant if you also have experienced a situation that has caused you to be unable to make your monthly payments.
There is a striking difference between what we are currently experiencing and what happened during the Great Recession. While both ultimately resulted in significant job loss, thus making it difficult for anyone to make their monthly payments, the biggest difference is the type of mortgages that are prominent today compared to 12 years ago. Then most homeowners selected adjustable rate mortgages for the affordable payments those initially offered. The problem there was when the initial payment period expired, the monthly payment skyrocketed, making it difficult for anyone to pay, even if you didn't lose your job.
Today, and most recently, homeowners have been selecting 30-year fixed rate mortgages that don't have the risk of increasing mortgage payments. This has added a layer of security for many homeowners. Meaning that if you have been fortunate enough to maintain your employment, you likely won't be affected by fluctuations in the home values.
However, if you have found yourself in a place where your income has shifted downward, and you are struggling to make your payments, there are a few options available to you. You can contact your lender and negotiate a deferment of payments, a loan modification, a short sale, or an exchange of a deed-in-lieu of foreclosure. You can also use the bankruptcy laws to help you through this situation as well.
One of those strategies is to file for Chapter 13 bankruptcy, where you will establish a payment plan for three to five years and have all non-secured debts discharged at the end. This also allows you to stay in your home if that is a goal. A chapter 13 can also allow you to “strip” or remove a junior mortgage if the value of the home is less that what is owed on the first mortgage. Since the junior mortgage is not secured because of the lower value, the bankruptcy code allows for the junior lien to be treated as an unsecured creditor, like a credit card, and for their security interest in your home to be removed at the completion of the Chapter 13 payment plan. This would leave you with only the first mortgage on the home at the end.
This, and the other strategies mentioned, are highly technical legal maneuvers that necessitates a professional to manage for you. This is why you are strongly urged to seek out the assistance of an attorney because your rights and liabilities will be affected.
We can help you navigate all of these issues. So if you, or someone you know, has found themselves in a tough financial situation, we can help. Give us a call today to schedule a no-obligation consultation and let us help you remove the financial stress.