Did You Get a Mortgage Modification? Read This and Be Prepared For Your Payment to Go Up!
Almost 4 million of us have active HAMP and other types of mortgage modifications. But what many don’t realize is that the reduced payments those modifications gave us, don’t last forever. In fact if you got your modification in 2009, you mortgage payment may be going back up again very soon.
Back when the real estate bubble burst, President Obama introduced the Making Home Affordable program which encompassed several alternatives to foreclosure including the HAMP modification (which only applied if your loan was owned or insured by Fannie or Freddie). FHA developed their own modification and many banks also then developed their own version of a mortgage modification, all similar to HAMP.
Folks who were able to get a modification generally had their monthly mortgage payment reduced to 31% of their gross monthly income, a historically proven prudent measure. In 95% of all cases this was accomplished by reducing the interest rate, sometimes to as low as 2%. But most modification documents clearly state that this interest rate reduction would only be for 5 years. We’ve talked about this many times on this blog and on air because we know from experience that a lot of people still don’t read those loan papers! So if your modification is circa 2009, that 5 year timeframe is coming up now which means that your interest rate may be going up (which will also of course increase your monthly mortgage payment).
I just want to be sure that you’re prepared.
For HAMP and many other types of mortgage modifications the modified interest rate will go up by 1% each year until it reaches the interest rate that was being charged for a 30 year fixed rate mortgage at the time you that your mortgage was modified. We’re anticipating that the median increase will be $242. And that will apply to about 800,000 HAMP modifications and about 3 million non-HAMP modifications between now and 2021. The tricky thing is that about half of those borrowers live in four states and – of course – Florida is one of those states along with California, New York and Illinois. So the economic impacts will be felt more heavily in those areas. The Carnegie Group has already proposed legislative relief in the form of a limited and temporary extension of the Mortgage Debt Forgiveness Relief Act of 2007 (that’s the temporary law that said you don’t have to pay income tax on the amount of debt your bank forgives when you short sell your home…it expired December 31, 2104) for areas in which the number of underwater homes still exceeds 30% since many of those folks will now see their mortgage payment increase again and short selling is essentially no longer an option.
So what can you do to prepare?
For starters, if you’ve not already done so, read your mortgage modification papers. I’m always happy to help explain those papers if you need help – just send me an email. At a minimum you will want to determine what the 30 year fixed rate was at the time of your modification so you know the maximum amount your payment can go up to and calculate how much more your payment will be with 1% annual increases so you that can budget for that. If you feel those increases are going to make your mortgage unaffordable again, then you may need to explore the option of refinancing – particularly with rates going up in general that’s not something you want to wait to do, time is not on your side here. And the last resort, of course, would be to consider selling and moving to a more affordable home. You may have been underwater when you got the modification so selling wasn’t an option. But home values have risen over 20% since the bubble burst and selling may now be a good idea.