Author Topic: Desperate to refinance an interest-only mortgage  (Read 5350 times)

dancemosaic

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Desperate to refinance an interest-only mortgage
« on: November 19, 2016, 04:33:02 PM »
Hi!

I am a first-time poster, but MMM saved my financial life several years ago, and I've been devoted ever since!

On behalf of a dear, completely stressed-out friend, I'd like to know if she and her husband are likely to be approved to refinance an interest-only mortgage with the following factors in mind:

1) combined income is about $3K - $5K/month (both are self-employed, neither income is consistent)
2) rental income (house is a duplex) is about $3K/month
3) mortgage debt = ~$1M (I think there were 2 or 3 interest-only terms, plus previous cash-out refinancing for repairs and upgrades)
4) property value = ~$3M
5) no principal has been paid since the home was purchased about 17 years ago
6) there is ~$15K in credit card debt (making minimum payments) and a car note of about $500/month
7) there are no savings from which to draw; an existing retirement account has been tapped several times and is now off-limits
8) there is private school tuition for one child of about $2K/month
9) utility bills run about $2K/month during the winter for the entire building
10) they really, really, really want to stay in their home; selling feels abhorrent

Can I reassure her? Or, do I need to help her become accepting of the idea of selling, or else lose the home with nothing to show for it?

Thank you in advance!

waltworks

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Re: Desperate to refinance an interest-only mortgage
« Reply #1 on: November 19, 2016, 10:00:05 PM »
There is no way in hell they will get any form of conventional mortgage. They may want to look at private/portfolio lenders as they at least theoretically have a metric ton of equity. But interest rates will be very high.

Really, selling is the way to go here. They are instantly rich/retired if they ditch the house and *rent half of it back from the new owners* at market rate! Even with a load of commissions/fees/capital gains, they'll end up with at least a cool $1.5 million instantly. At 4% SWR, they're set for $60k/year, though it sounds like they're not so hot with money and would need quite a bit more than that to really retire.

I am baffled by the "selling feels like failure" thing. They are the house-poorest people I've ever heard of! Selling = huge win.

At the very least, if they want to pay down principal, presumably their loan allows them to do that? No need to refinance, just start paying the damn thing off.

-W

dancemosaic

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Re: Desperate to refinance an interest-only mortgage
« Reply #2 on: November 19, 2016, 10:52:25 PM »
My friends are NOT Mustachian, and are in fact quite status-conscious. Also, the house is of more sentimental value than financial to them. Plus, they live in a super HCOL area and the homes are really appreciating due to gentrification. $1.5M will not take them near as far as they want to go.

Is the issue which will stymie the refinance primarily the lack of income? Or, is it the fact that they are self-employed? Or, is it that they don't have any savings with relatively low-ish credit scores (truer words have never been spoken: "they are not so hot with money!!"). They certainly don't have the money to put even a dime towards principal. The mortgage payment just reset from $5600 to $7600 per month, and she borrowed from her old 401K (again) to try to keep up. Panic has ensued.

I want to tell her what the mortgage underwriter may balk at, so they can mitigate, if possible.

It is amazing to me that one can be so house-poor, and I'm really terrified for my friend because she is so scared about what will happen if they are denied the refinance. I didn't think the banks would allow you to dig a hole this deep!

What is the worst case scenario if they get a "no" and still refuse to sell? Are there ANY other options? If not, how much time might they have before the bank swoops in???

former player

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Re: Desperate to refinance an interest-only mortgage
« Reply #3 on: November 20, 2016, 03:09:06 AM »
Reliable income of $6k a month going up to $8k in a good month.

Outgoings of $7.6k mortgage, $2k utilities and $2k school fees.  They are in the hole for $3.6k a month over the winter even in a good month for earnings.  And that's before any other living costs are paid.

No other assets to tap, credit card debt of $15k.

Bankruptcy looms, and they will lose the house then anyway.

What happens if they move out to rent somewhere cheap, rent out their side of the expensive duplex and take the kid out of private school?  That potentially ups their income by about $3.5k a month.  Still doesn't do the trick.

How about selling half the duplex?  If that is doable, they might get less than half the value of the whole so it's not a good financial move but it would stave off their eventual bankruptcy for a time while letting them stay in their home.

But that sound they are hearing is several decades worth of poor financial decisions chickens coming home to roost.

sokoloff

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Re: Desperate to refinance an interest-only mortgage
« Reply #4 on: November 20, 2016, 07:29:41 AM »
Condo-izing and selling half the duplex will leave them mortgage free and not on track to bankruptcy at all (until they realize that they have "all this extra money" all the sudden and lifestyle explosive fountain of waste springs anew).

There is no path that leaves them "owning" the whole property in the end. Well, they could hit the Powerball or something...

waltworks

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Re: Desperate to refinance an interest-only mortgage
« Reply #5 on: November 20, 2016, 08:38:47 AM »
Yeah, this isn't even complicated. They make a fraction of the income they need to support their debts. Nobody will give these people a mortgage, no way, no how.

-W

dancemosaic

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Re: Desperate to refinance an interest-only mortgage
« Reply #6 on: November 20, 2016, 08:42:44 AM »
My friend is prone to anxiety and depression; her children both have special needs and her business is fledgling. Her husband makes hardly any money at all and refuses to look for formal employment. I think she doesn't have the emotional bandwidth to explore creative options like "condo-izing", although I also think she would reject the idea out-of-hand, as she would resist giving up/selling any part of "her" house.

Also, her husband handles all of the finances, and I think it is fair to characterize him as financially incompetent. She signs whatever he puts in front of her, often without understanding it or asking questions. I wouldn't be surprised if he figures out how to "condo-ize" the property without her knowing! While this would free up lots of cash, they have a way of making money disappear that utterly baffles me. They have been on "the edge of the ledge" many, many times.

I know that my friends have made years and years worth of poor financial decisions, many of them to fuel the acquisition of wants conflated with needs; to fill a void created by very, very fragile self-esteem, and of course, to keep up with those damn Joneses.

The bottom line expressed by my friend is simple and unwavering: I don't want to lose my home. While this may be "chickens coming home to roost", my friend is a kind, warm and loving person who has been trying to stay one step ahead of her personal demons for her entire life (they're both 47).  Watching this end-game is heartbreaking, and I really want to be able to throw her a life-line, even if in purely pragmatic terms, she and her husband don't "deserve" one.

waltworks

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Re: Desperate to refinance an interest-only mortgage
« Reply #7 on: November 20, 2016, 08:48:42 AM »
Well, they can't keep the house. They can keep a cool million-and-a-half, though. Or not, if they really decide to be dumb about it and let the place get foreclosed.

How did they buy the house in the first place?

-W

sokoloff

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Re: Desperate to refinance an interest-only mortgage
« Reply #8 on: November 20, 2016, 08:57:47 AM »
You can say your friends are financially incompetent, but the facts and math of the matter is that they are multi-millionaires (probably just barely so, but I suspect they have a net worth of just over $2MM based on the facts presented and some fairly conservative assumptions).

So, they have that going for them. And they're seemingly about to squander it.

The fact of the matter is that they can't afford their current situation and need to make an adjustment. If they're already not living in half the duplex, condo-izing and selling doesn't leave them all that differently off day-to-day (though they stop getting the appreciation on half the property, of course). Day to day, no different, except their mortgage goes away, their utilities go to about half of what they're paying now, they stop paying property tax and insurance on half the building, they stop doing repairs on half the building. That's by far the obvious path if they like where they currently live.

Real estate appreciation has bailed these people out, BIG TIME. Now is the time to take some of those chips off the table, and if they are as financially wasteful as they seem to be, they might be well-advised to set up some trusts for the kids so the siren song of lots of "free money" doesn't pull them back into Scylla or Charybdis.

I usually don't get all that worked up about other people's problems, but here's a case where there is an abundance of wealth, more than enough to let this family live a very comfortable lifestyle and provide for kids with some special needs, but the heroes in the story seem hell-bent on destroying it.

Not my monkeys, not my circus, but damn this is frustrating.

dancemosaic

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Re: Desperate to refinance an interest-only mortgage
« Reply #9 on: November 20, 2016, 09:04:57 AM »
I think they initially got into the house with an interest-only loan, combined with a construction loan  (the place needed major rehab).

I also suspect that after the first interest-only term expired, he refinanced them into ANOTHER interest-only loan (she is under the impression that they have had the same IO loan as when they first purchased the property, but everything I've read tells me that the longest IO term is 10 years, and they've been in the house for almost twice that long).

There were also several equity cash-outs, for I don't know what-all, but some of it was definitely for wants (like a luxury SUV).

Although her name has not been on the loan docs up till now (only the deed, for reasons I don't understand), they are both applying for the refinance now, ostensibly because without her bit of self-employment income, they have no chance at all of being approved.

I don't think he's beyond working with a hard-money lender, a loan-shark or someone equally shady if the banks turn them down. I understand that even this will only be a stop-gap, but I don't think she does. Part of the core-issue in my opinion is that he perceives himself as a big-shot deal-maker, above working a pedestrian job like the plebes, and is a classic "big-hat-no-cattle" caricature.

But still, it's hard for me to draw the "you made your bed" line, especially since if I hadn't escaped my own marriage to an similarly deluded ex-husband, this would surely have been my life.


waltworks

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Re: Desperate to refinance an interest-only mortgage
« Reply #10 on: November 20, 2016, 09:14:53 AM »
Disaster on all fronts.

I don't think even the shadiest of portfolio lenders is going to give these people the time of day. C'est la vie.

They should cash out. Yesterday. But obviously they won't so as their friend, I'd say the best thing you can do is be supportive as the ship goes down.

-W

dancemosaic

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Re: Desperate to refinance an interest-only mortgage
« Reply #11 on: November 20, 2016, 09:15:01 AM »
And yes, they do currently live in half of the building. There is no chance that my friend will be OK with them moving out, even if it advantages them financially. You know how people cling to their homes against all logic to the contrary? Well, that's them.

And yes, this is damn frustrating (I've lost quite a bit of sleep since learning about this latest situation). I know it's not my monkey/circus and if I didn't love her, I would find this merely fascinating as an anecdotal story, instead of a tragic impending disaster.

One takeaway for me lies in the decisions we make when we choose to hitch our wagons to another person. Not that it's all his fault by any means, but sometimes we can choose really wrong.

waltworks

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Re: Desperate to refinance an interest-only mortgage
« Reply #12 on: November 20, 2016, 09:17:18 AM »
As their friend, it sounds like the best thing you could do is make sure nobody is home and then burn the house down.

-W

sokoloff

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Re: Desperate to refinance an interest-only mortgage
« Reply #13 on: November 20, 2016, 09:19:03 AM »
Yeah, yeah. I get that they live in half the building.

I'm saying "sell the half of the building that they're ALREADY not living in" (instead of continuing to rent it). (Edit: I now see how my language led you astray. I phrased that terribly unclearly.)

That's the sanest path forward (and is actually a ridiculously great outcome/reset for them). No day to day lifestyle change at all (except positive ones).

Edit: Any lender that will work with them has an angle. No legit lender will give these people more than a 15 minute courtesy consultation and a bottle of water. Urge your friend to be careful here if they do find someone who will finance them.
« Last Edit: November 20, 2016, 09:21:38 AM by sokoloff »

MrSpendy

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Re: Desperate to refinance an interest-only mortgage
« Reply #14 on: November 20, 2016, 09:39:03 AM »
If they want to keep up appearances and stay in the house, they should find an enterprising individual investor who will give them a mortgage that combines cash and PIK interest.

A creative arrangement would be something like this:

$1mm loan @ 10% interest-only, 3.6% cash and 6.4% Payment in kind.

the lender gets 3.6% cash yield (basically sweep the rental cash flow to the lender) on a 33% LTV loan and gets compensated for the risk of lending to these people who have no business in this house by the accrual of the PIK interest (the loan amount increases each year)

the borrower gets to stay in the house but slowly loses their equity, eventually they'll have to sell.

Basically they need to somehow monetize their equity while staying in the home. Given how hard it is to foreclose on people, i think it would be hard to find such a lender. the property is  probably in California, NYC or DC, right?

what are property taxes on a $3mm home?

they need to find an opportunistic investor that will loan them the money, the investor could take the angle that they'll eventually fall behind on their property taxes  and / or the mortgage and have significant upside in foreclosure, the low LTV would probably compensate for the regulatory headaches and time it would take to get the home.

dancemosaic

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Re: Desperate to refinance an interest-only mortgage
« Reply #15 on: November 20, 2016, 09:39:58 AM »
HA!!

Considering that it would be really hard for me to downsize from a lovely, affordable 3BD 2BA condo to a prison cell, I think that after careful consideration, I will respectfully reject the advice to commit arson and insurance fraud!!!

I've already insisted that she ask questions and make sure she understands anything she is asked to sign, with shady mortgage brokers (and a potentially shady husband!) in mind.

If the refinance doesn't go through (and by all accounts, it won't), then I'll broach the idea of selling the other apartment. She won't be ready to hear it until then. That'll be my "life-line". That, and volunteering to help them move...

This situation sucks balls. :(

dancemosaic

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Re: Desperate to refinance an interest-only mortgage
« Reply #16 on: November 20, 2016, 09:52:33 AM »
"...the property is  probably in California, NYC or DC, right? " Right.

"...the borrower gets to stay in the house but slowly loses their equity, eventually they'll have to sell." The "eventually have to sell" part, if she understands this upfront, makes this type creative temporary financing a deal-breaker for her. She would have to not realize this was a key feature of the agreement.

I don't know what the property taxes are. They are rolled into the new $7600 payment.

This is a stunning number to pay for any one thing, every single month. Maybe I'm just a financial lightweight.

sokoloff

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Re: Desperate to refinance an interest-only mortgage
« Reply #17 on: November 20, 2016, 10:00:09 AM »
Make (a lot) more current income, sell part of the property now, sell part of the property later, or sell all of the property later are the only plausible outcomes.

If they can face that stark reality, they can exit this situation on top as multi-millionaires.
Denial will slowly start to choke off options for them.

I wish your friends the best.

waltworks

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Re: Desperate to refinance an interest-only mortgage
« Reply #18 on: November 20, 2016, 10:01:29 AM »
Just to be clear, my arson suggestion was a joke. Perhaps that wasn't clear enough.

They could take up HAM radio and install some very tall, ungrounded antennas, though. I'm just saying, HAM radio is fun...

-W

dancemosaic

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Re: Desperate to refinance an interest-only mortgage
« Reply #19 on: November 20, 2016, 10:16:03 AM »
I totally got the joke! It's just that orange may be the new black, but it's never been my color!! :)

AS for HAM radio, I would go one better: how about erecting a cellphone tower right through the middle of the house and leasing it to all the neighbors at half the price they're currently paying? They could make a killing, enough to compensate for the "skylight" they created in their ceiling... ;)

Dicey

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Re: Desperate to refinance an interest-only mortgage
« Reply #20 on: November 20, 2016, 10:32:55 AM »
Dancemusic: Look me in the eye and pay attention, please.

Never help anyone more than they are willing to help themselves!

Thank you for caring, but this is not your circus.

waltworks

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Re: Desperate to refinance an interest-only mortgage
« Reply #21 on: November 20, 2016, 10:34:22 AM »
Have them watch Risky Business with you and drop lots of hints about how they could make a little extra money on the side?

-W

K-ice

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Re: Desperate to refinance an interest-only mortgage
« Reply #22 on: November 20, 2016, 10:53:20 AM »

 The mortgage payment just reset from $5600 to $7600 per month...



Sorry but how does this happen?  I don't even know what "payment reset" means.

Maybe I'm just a naive Canadian but I would think the banks learned from the 2008 collapse & are not screwing over their clients with huge jumping mortgage payments.

$1M 30y mortgage at 5% would be payments of about $5500/month.

With the rent from the other 1/2 & their incomes it will be tight but I think it's possible.
The home has lots of equity, if it was worth $900K is see major issues. But why is it not possible to get a new mortgage 30y 5% ...?

Maybe they can find a creative lender to convert in into a HELOC. Those can be paid like interst only loans forever. However, a HELOC is dangerous with someone so financially inept.

sokoloff

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Re: Desperate to refinance an interest-only mortgage
« Reply #23 on: November 20, 2016, 11:01:46 AM »
An interest only loan could be 10 years of interest only and then a recast into a 20 year mortgage after 10 years. Property taxes and insurance are those of a $3MM, not $1MM house, so will be higher.

It's not about the banks learning; it's just math. To get the principal repaid in 20 years, the payment is necessarily much higher than the interest only amount they've been paying.

dancemosaic

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Re: Desperate to refinance an interest-only mortgage
« Reply #24 on: November 20, 2016, 11:04:42 AM »
There was an episode of Life or Debt (on Spike TV) where a similar couple just could not /would not give up their luxury lifestyle, even if it meant losing their luxury home. I wept while watching it, as my friends were looming so large in my mind...

Diane C, I know you're right about not being able to help others more than they're willing to help themselves. Normally, I have no problem remaining detached, simply by asking myself the question, "What did they think was going to happen, if they refused to bring in enough income to support a super-expensive lifestyle, or downsize to a simpler one?? This is not rocket science..." Yet this feels different...

I have not done anything overtly to help (I haven't given money or anything like that) although I have done quite a bit of reading about refinancing, IO loans, and the like.

I just know how utterly devastated my friend will be to leave her home. Utterly. Devastated. I am going to do what I can to convince them to sell and/or condo-ize (I have no idea if this is possible in their circumstance). And I will pray, not for a miracle, but for their acceptance that whatever happens, this house will not be part of their long-term future.

I admit that I am particularly sad because my life was very much on track to have this tragedy unfold within it. I was rescued by a series of events and truths: I don't have children, I'm not incapacitated by depression, I'm not opposed to working (and in fact, I love my job), I am not afraid of being alone, I don't give a shit about the Joneses' opinion of me, I didn't want to be married anyway, and when I learned about the financial drama encroaching upon me (another story for another day), I didn't hesitate to leave. I didn't know what was ahead, but I knew I wasn't going to stay in my present. The fact that I am now financially savvy and saving about 70% of my income (including maxing out my HSA, Roth and 403B, plus saving in post-tax accounts) is only because I got the hell out. Finding MMM was a huge part of my resurrection, but I had these other things going for me as well.

My friend is trapped, not just by her own insecurity which she tries to salve with expensive stuff, by also by the marriage itself (also another story for another day). She has neither the emotional wherewithal nor the logistical options to rescue her family from their self-created nightmare. Her one and only option, to leave with her children and stay with her parents, is not on the table. At least not for now.

K-ice, the additional $2000 "reset" is because the principal has been tacked onto the IO portion, hence the urgent need for the refinance.




Cpa Cat

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Re: Desperate to refinance an interest-only mortgage
« Reply #25 on: November 20, 2016, 11:10:58 AM »
Usually, the only way that people who are terrible with money build wealth is through real-estate. Because - as demonstrated here - they are emotionally committed to real estate, and are willing to sacrifice just about anything to keep a property.

The obvious answer is to move and sell the whole thing (or section 1031). But it's actually not so obvious. If they put 1.5M in the bank without injecting it right back into real-estate, they will likely blow through it in no time.

Next option is to Section 1031 exchange the rental half of the house into a less expensive rental while cashing out a small amount to take care of their other debts. They'll end up eating some gain, but end up with a rental property they can actually get a mortgage for.

Financially and tax-wise the best option is to sell the whole thing - section 1031 the rental into another rental and exclude $500k of the gain on the personal residence portion while buying a personal residence outright with no mortgage. But I get the impression that doing the right thing financially is a non-starter.

Unfortunately for your friends (and you, as the advice giver), Magic Money Tree In the Back Yard is not on the table. Nor is Magic Money Tree At The Bank. This seems to be the only option they're interested in, and it's not realistic.
« Last Edit: November 20, 2016, 11:14:44 AM by Cpa Cat »

sokoloff

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Re: Desperate to refinance an interest-only mortgage
« Reply #26 on: November 20, 2016, 11:20:01 AM »
Ref: condo conversion. If the house was originally built and titled as a duplex, where each side just happens to have the same owners, then there may be literally nothing that needs doing in order to sell the side they don't live in.

There could have been some physical work on the house that was done that could stand undoing (if a landlord owns the whole building, they may have combined utilities or mechanicals in an attempt to save costs that may now prevent a clean division of supply to each unit, for example). But those are probably a "nice to do" not a "must do".

Condo conversion literally just means changing the ownership structure of the building (typically dividing a previously single-family house into multiple units). If it is a duplex, this may be moot.

dancemosaic

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Re: Desperate to refinance an interest-only mortgage
« Reply #27 on: November 20, 2016, 11:25:42 AM »
Sokoloff, the house is not a classic duplex. It was a single home and when they moved in, they created a rental apartment and they live in the other portion of the house. It is legal in terms of permits (although the utilities are not separated), and it is very expensive and onerous to create this separation where they live. Not to mention that they don't have any money anyway.

So," condo-izing" may be possible, but I don't think they've explored it, nor do I think they (especially she) would be open to it.

Metric Mouse

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Re: Desperate to refinance an interest-only mortgage
« Reply #28 on: November 20, 2016, 11:49:30 AM »
Sokoloff, the house is not a classic duplex. It was a single home and when they moved in, they created a rental apartment and they live in the other portion of the house. It is legal in terms of permits (although the utilities are not separated), and it is very expensive and onerous to create this separation where they live. Not to mention that they don't have any money anyway.

So," condo-izing" may be possible, but I don't think they've explored it, nor do I think they (especially she) would be open to it.

They spent the money to create a rental portion and then never rented it? :(

sokoloff

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Re: Desperate to refinance an interest-only mortgage
« Reply #29 on: November 20, 2016, 12:00:32 PM »
Item #2 in the first post is the rental income from the created unit. (Or at least, I assume that's the case.)

dancemosaic

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Re: Desperate to refinance an interest-only mortgage
« Reply #30 on: November 20, 2016, 12:05:48 PM »
"Item #2 in the first post is the rental income from the created unit. (Or at least, I assume that's the case.)"

Yes, that's correct.

MrSpendy

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Re: Desperate to refinance an interest-only mortgage
« Reply #31 on: November 20, 2016, 12:07:59 PM »
what would the portion they occupy rent for?

Metric Mouse

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Re: Desperate to refinance an interest-only mortgage
« Reply #32 on: November 20, 2016, 12:09:48 PM »
"Item #2 in the first post is the rental income from the created unit. (Or at least, I assume that's the case.)"

Yes, that's correct.

Eesh. I got so caught up in the 'sell the other half' that I missed that. Sorry all.

dancemosaic

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Re: Desperate to refinance an interest-only mortgage
« Reply #33 on: November 20, 2016, 12:23:26 PM »
"what would the portion they occupy rent for?"

Based on current rents in the area and the condition of their unit (which needs work; there's been deferred maintenance due to lack of cash flow), I estimate they could get maybe $3000/month? Maybe??

Dicey

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Re: Desperate to refinance an interest-only mortgage
« Reply #34 on: November 20, 2016, 02:32:28 PM »
I think they lost me at private school.

Dicey

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Re: Desperate to refinance an interest-only mortgage
« Reply #35 on: November 20, 2016, 02:39:29 PM »
Yeah, going to pile on and say that from reading this, it seems like they chose to live an artsy-fartsy lifestyle but expect to live in the style of white-collar professionals. Read these words with gentle ears: How, exactly is that your problem and what is the likelihood that they are ever going to change their ways?

Nothing against anyone who chooses the Arts. Most of those who do are realistic about their finances, at least by the time they get to be the ages of this couple. 

cchrissyy

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Re: Desperate to refinance an interest-only mortgage
« Reply #36 on: November 20, 2016, 03:37:57 PM »
I agree with the people who say this isn't your problem to lose sleep over.

There is no chance they get a refi to an affordable payment. They are headed for foreclosure and/or bankruptcy and/or selling the place and banking the money. It is their choice and whatever happens next is not your fault.
« Last Edit: November 20, 2016, 03:44:53 PM by cchrissyy »

Cpa Cat

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Re: Desperate to refinance an interest-only mortgage
« Reply #37 on: November 20, 2016, 04:08:10 PM »
Since your friend is unwilling to consider any other option, she'll simply have to apply for a few mortgages and see what the options are.

You can contact a few realtors in town and ask them to recommend the shadiest mortgage brokers in town - the banks and brokers who they send their clients to when they're having trouble getting financing.

I did have a client who was turned away from various lenders, but eventually found one on the eighth or ninth try (of course, when it came time to close, they couldn't afford the closing costs, so it fell through - there's a reason why some people can't get a mortgage).

Do they have a relationship with any local banks? Sometimes bank presidents have leeway for special case customers.

The documents that they have to pull together are generally the same for each bank, so make sure they keep copies in a "mortgage file" so that it makes applying to multiple mortgages quicker and easier. They'll probably need an appraisal - so make sure they choose an appraiser who is approved for many different banks, because they can sometimes re-use the same appraisal if it's not too old and the appraiser is on their list.

But even if you do offer this "help" and they succeed in getting an interest-only mortgage, this is just kicking the can down the road a bit.  Interest rates will rise over the next decade, they still won't have the cash to catch up on deferred maintenance, their income won't get better as they age, they will still never make a principal payment, and they will make no plans for how they're going to deal with this next time. "Helping" them find a lender who will give them an interest-only mortgage is not helping them at all... it's enabling them. They need to make responsible, adult decisions for themselves - and you are attempting to help them do the opposite of that.

Cassie

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Re: Desperate to refinance an interest-only mortgage
« Reply #38 on: November 20, 2016, 04:21:03 PM »
I think the best you can do as a friend is to help her understand that they can't afford to lose the house. Ask which is worse to either sell the house and walk away with $ or to lose it and have nothing? 

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Re: Desperate to refinance an interest-only mortgage
« Reply #39 on: November 20, 2016, 04:54:09 PM »
"I think the best you can do as a friend is to help her understand that they can't afford to lose the house. Ask which is worse to either sell the house and walk away with $ or to lose it and have nothing?"

This is exactly the approach I am planning to take. This is what I would do if I was in their position, so this advice feels totally authentic for me to give her. I know how hard it will be for her to hear...

Facing this particular reality comes with accepting several others: they will likely have to move out of the city entirely or else downsize to an apartment within the city which, even if they pay for it in cash, will be nowhere near the kind of home in which they're used to living. The private schools will be off the table, as will all the other accoutrements of their lovely life. For most people this would be humbling. For them, it will be humiliating.

The only way I can visualize a "soft landing" is if they move out of the city to a much lower COL, but I know they don't want to do this, either. I am aware that to objective ears, they deserve no sympathy at all, since "they want what they want", and don't want to sacrifice anything although they can't afford to keep anything they have. Yes, they are being entitled and unreasonable. Honestly, as I've said before, this would be something I would have posted on the Shame board if these were strangers I'd only heard about. I just feel so bad for their financial cluelessness, and how hard the eventual fall will be.

And, I also feel so thankful that I avoided this same fate. Even though my marriage created absolute financial mayhem for me for several years, I was able to regroup, and then some. I just don't see this happening for my friend.

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Re: Desperate to refinance an interest-only mortgage
« Reply #40 on: November 20, 2016, 05:13:00 PM »
Don't feel too bad for them. They're set to walk away with 1.5 Million dollars to sink into a mortgage-free property, with money left over to pay off their credit cards and even fund some private school, if they want.

I get that they may currently live in a HCOL area, but seriously... how is 1.5 Million in cash not a soft landing?

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Re: Desperate to refinance an interest-only mortgage
« Reply #41 on: November 20, 2016, 05:39:03 PM »
It's only a soft landing if they do the financially logical thing. I'm worried that they will go all "balls to the wall" and refuse to sell, and instead choose to go down with the ship.

I know people do this all the time. I don't think my friends are exempt from this degree of "commitment" to their property, given, as another writer pointed out, that where wealth is concerned, it is their only asset. To me, this is the height of irrationality -in-action, although I really, really hope I'm wrong.

cchrissyy

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Re: Desperate to refinance an interest-only mortgage
« Reply #42 on: November 20, 2016, 07:51:07 PM »
Honestly, they have no hope of affording $2k/month private school as it stands right now. Unless there is a rich grandma or uncle in the picture, selling the house and getting a place they can afford and setting aside some money is the only way they can stay with the expensive school. 

If anything, perhaps you could pitch the idea of selling the house as the thing that guarantees they can keep paying for it.


I wouldn't worry too much about the idea they might go "balls to the wall" refunding to sell, and therefore lose it all. Surely, at some point after they miss their mortgage payments, and get warning letters about foreclosure and cannot find a way to avoid it, they will realize that keeping this house is not in their future, no matter what. and they'll sell. right?! Are these people honestly so irrational that they would hold on to the idea of this house even when scary letters from the bank promise to take it away?

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Re: Desperate to refinance an interest-only mortgage
« Reply #43 on: November 20, 2016, 09:37:55 PM »
Holy,  moly batman!

A $3M duplex, and one half is rented out for 3k per month.
WTF?  Half the value is 1.5M... that duplex half should be rented out AT LEAST $7.5k per month for 0.5% rule...

unless they are only renting a crappy 1 bedroom garden suite or something, and living in a home worth $2Million alone.

Just on income, around here they take half the rent and all the income and multiply by 38%...
$5.5k x 38% = $2,090 per month for mortgage, insurance, taxes and heating..

The maximum they would afford is a $475k mortgage at 3% interest, 30year amortization -- half of what they currently have, assuming that the bank agrees that property taxes, heating are pretty much zero cost, and all other debts are smallish.


Cassie

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Re: Desperate to refinance an interest-only mortgage
« Reply #44 on: November 21, 2016, 06:38:07 AM »
People can be pretty irrational sometimes when it comes to a house they love. I know some people that were left a paid off house by their parents which was nice. So they sell and upgrade to a new home that cost 2x's as much. He loses his job and they can't afford mortgage on her job. The market crashes and they can't sell. They lose the home and in effect squandered the $ left to them and end up renting.  It sounds like in your friend's case you have 2 people that are not good with $ and the husband sounds like a bully who does not seem too rational. So even if she wants to sell she has to convince him. Also status can be a huge motivator for people to do irrational things.

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Re: Desperate to refinance an interest-only mortgage
« Reply #45 on: November 21, 2016, 07:16:30 PM »
Until they become realistic about their financial ignorance and past bad choices they are screwed. As pointed out they will either lose the house and have nothing or sell the house and have $1.5m.
Past performance does not guarantee future results but I am pretty sure they will blow the $1.5m.

The way I see it as a friend you can either risk your friendship and lovingly tell them the truth or keep on enabling them ( I know, sorry for the harsh judgment, I can be a little too frank...) and watch them circle the drain, either way your friendship is at risk.
Good luck, money and friends and money and family can be tough. Mixing money and emotions always makes a mess.

dancemosaic

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Re: Desperate to refinance an interest-only mortgage
« Reply #46 on: November 21, 2016, 09:32:13 PM »
After more than 24 hours of considering all the feedback I've received here, I've realized that the chips must fall as they will. My friends are not willing to "condo-ize", nor increase the rent, nor rent out their own unit, nor get jobs, nor sell. They are only willing to try to refinance.

Unless they change their minds, there's nothing I can do except help them move when the time comes. I feel really sad, but at least I know the family can stay with her parents; they won't be out in the street.

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Re: Desperate to refinance an interest-only mortgage
« Reply #47 on: November 22, 2016, 02:12:15 AM »
After more than 24 hours of considering all the feedback I've received here, I've realized that the chips must fall as they will. My friends are not willing to "condo-ize", nor increase the rent, nor rent out their own unit, nor get jobs, nor sell. They are only willing to try to refinance.

Unless they change their minds, there's nothing I can do except help them move when the time comes. I feel really sad, but at least I know the family can stay with her parents; they won't be out in the street.
Sometimes, when people are stubborn, stepping back is the right call.

Hopefully they become more flexible while there's still time before being in major trouble.
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Re: Desperate to refinance an interest-only mortgage
« Reply #48 on: November 23, 2016, 07:52:30 AM »
After more than 24 hours of considering all the feedback I've received here, I've realized that the chips must fall as they will. My friends are not willing to "condo-ize", nor increase the rent, nor rent out their own unit, nor get jobs, nor sell. They are only willing to try to refinance.

Unless they change their minds, there's nothing I can do except help them move when the time comes. I feel really sad, but at least I know the family can stay with her parents; they won't be out in the street.

With supportive people like you in their lives they should be alright, even if things get as bad as you fear.  You can't always stop bad things from happening to those you care about, but you can be there and support them if and when they do.