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Homeowner must take care of missing payments or pay off mortgage by refinancing or selling home
Published on Saturday, Oct 06, 2007
Editor's note: This is among the last columns written by Robert Bruss, who died Sept. 26 of complications of colon cancer.
Q: We are behind three months on our home mortgage payments due to illness and unemployment. The mortgage loan servicer has been very uncooperative when we tried several times to make partial payments. Last week, the loan servicer began the foreclosure process by recording the legal documents. So far, we have heard from three lawyers who specialize in bankruptcy. They tell us to file bankruptcy to stop the foreclosure. Is this a smart decision? Alice V.
A: Filing either Chapter 13 bankruptcy reorganization or Chapter 7 ''straight'' bankruptcy will delay the foreclosure sale of your house. But the auction will eventually occur unless you reinstate the mortgage, refinance it or sell the house. When you file bankruptcy, an ''automatic stay'' stops creditors from collection efforts, including a foreclosure sale.
But your mortgage is a loan secured by your home. Filing bankruptcy won't prevent the home's eventual forced sale unless you either reinstate the mortgage by paying the missing payments or pay off the mortgage by refinancing or selling the home.
Before you can file bankruptcy, you must meet with a certified bankruptcy counselor to discuss your alternatives. Unless you are truly broke, filing bankruptcy could be a major mistake because creditors look very unfavorably on bankrupt debtors.
Chapter 13 bankruptcy, if you now have income, allows you to reorganize and pay off your debts over as long as 60 months. This program gives you time to make up those missing mortgage payments. However, if you miss any payments in your reorganization plan, as approved by the bankruptcy court, then the lender can proceed with the foreclosure.
Chapter 7 is what I call ''ultimate bankruptcy.'' If you have more liabilities than assets, you can then be forced to sell your home and other major assets, with some exceptions such as work tools. Your creditors would be paid, usually pennies on the dollars owed. If you have equity in your home, the mortgage lender will get 100 percent payment as a secured lender.
Don't be railroaded into filing bankruptcy. Talk with a certified bankruptcy counselor to discuss your alternatives. Maybe the situation isn't as dire as you think.
Q: We bought our home in May 2007. Recently we received an official-looking form telling us the U.S. Government Federal Citizen Information Center Web site recommends property owners should have an official or certified copy of their deed. This company offers to sell us a certified deed copy for $69.50. This is our fifth home, and we have never received this type of letter before. Is it legitimate or a scam? Carmine C.
A: That sounds like a scam. Why didn't I think of that? It sounds like a rip-off of homeowners. There is no need for you to obtain a certified copy of your deed.
If you want a copy of your deed, just stop by your local county or city deed recorder's office and buy a copy for about $10. Or phone the title insurer where your home purchase was insured and ask for a courtesy copy of your recorded deed.
Q: My husband and I are retired. We own our home, worth about $500,000, without any mortgage. Now we want to add a bedroom and a family room. Is the best way to pay for this a home equity line of credit or a fixed-rate mortgage for about $100,000? Gerry M.
A: Either alternative is fine. With a $100,000 mortgage, the fixed interest rate should be around 6.5 percent today, plus closing costs. You will then have a fixed monthly payment for 15, 20 or 30 years (your choice).
But a home equity line of credit (HELOC) is more flexible and easier to obtain. There are usually no closing costs. However, the interest rate will be higher, probably around the prime rate of 8.25 as I write this.
My preference would be a HELOC for as large an amount as possible, perhaps $200,000 to $400,000 in your situation, depending on income, just in case you need cash quickly for an emergency or an investment opportunity.
For example, several months ago, I obtained a $400,000 HELOC over the phone from a major nationwide bank at an interest rate three-fourths of a percentage point below prime. Although I haven't used that money, it's nice to have it easily available by just writing a check.
The major HELOC benefit is it doesn't cost anything until you write a check to use the money. Your monthly payments can be as low as interest only, or you can pay more and reduce the principal balance rapidly. Then you can reborrow the money.
After your home improvements are complete and paid for with HELOC funds, then you can decide if you want to refinance with a new first mortgage.
Q: If a senior citizen owns several properties and the deed has his or her name only, what happens to the properties when the owner dies? Will they go to the children? Athena M.
A: If you die without a will, or the title to each property is not held in the name of your revocable living trust to avoid probate, the local probate court will determine who inherits your properties.
Editor's note: This is among the last columns written by Robert Bruss, who died Sept. 26 of complications of colon cancer.
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