Three Real Strategies for Upside-Down Mortgage Loans

Posted by  on Jun 28, 2010

Accrding to a recent survey from Trulia.com and RealtyTrac, nearly three out of five Americans wouldn't consider walking away from their mortgages--despite all the media buzz about "strategic default." That's good news, considering both the improving economy and the growing concern that many borrowers have become negligent about fulfilling their financial obligations.

Being upside down on your mortgage loan isn't a good feeling for anyone. Here are three suggestions for improving your strategic financial position while avoiding default--in spite of an underwater mortgage.

Stay the Course

"Strategic default" isn't just walking away from your mortgage because you can't make monthly payments. It's a strategy designed to force a property into foreclosure, potentially allowing you to buy it back at a significantly reduced price or forcing other concessions. It's risky in many ways, but some investors have placed their bottom line before their credit scores to pursue this kind of plan.

Instead, if you have been able to make your mortgage payments consistently, staying on track can preserve your credit score while real estate values slowly improve. Particularly if you plan to be in your home for many years, biting the bullet and continuing your payments could be the best strategy.

Consider a Mortgage Loan Modification

Government officials bore the brunt of criticism early in the mortgage loan modification process for making application and qualification procedures too hard for most consumers. The Detroit Free Press recently profiled a group of Michigan residents who faced foreclosure because application errors and delays prevented them from qualifying for modifications.

You can't shop for more competitive rates as part of a loan modification, since your existing lender has to work with you and with government agencies to make these deals happen. Social service agencies can help prepare your modification request, but beware of companies that want to charge you thousands of dollars in fees to process your application on your behalf. Very few "modification agents" offer legitimate services that result in any real savings.

Hunt for Refinance Deals

The federal government recently relaxed some of the rules for refinancing mortgage loans, making it easier for banks and consumers to meet in the middle on slightly upside-down properties. If your home was recently reappraised and your loan-to-value is as high as 125% (meaning you owe up to 25% more on your mortgage than the home is worth), you may still qualify for a refinance under the Home Affordable Refinance Program (HARP).

You can shop rates online and talk to refinance lenders about success they've had with converting old mortgage loans into better deals under today's mortgage rates and assessments.


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