I’ve listened to Ilyce’s radio show for years but never thought I’d have to ask for help. This is regarding my daughter.
She and her husband have a mortgage and home equity loan, and have paid on both loans for 15 years now, even during the financial crisis. They just got a notice that the home equity loan of $82,000 is being converted to a fixed rate loan at 6.25 percent with a $1,900 per month payment. Because my son-in-law is self-employed, he claims very little income on his income statement. His main mortgage balance is about $120,000.
My daughter talked to her bank, but they would only offer to refinance both loans with an appraisal of their home. My son-in-law’s claimed income will not meet their loan requirements. Is there anywhere they can turn at least to refinance the $82,000 loan? We just retired in July. Although we could cash in stocks and probably scrape together that much, I know she doesn’t want us to do that.
Thanks for listening to Ilyce’s radio show. We think you might be leaving out some details about your kids’ finances in your letter. The interest rate on your kids’ second loan isn’t that bad. The rate could be better but the real issue seems to be that their original loan was probably an interest only loan that has now converted into a permanent loan with amortization.
For years, they paid only the interest on the loan and it seems they didn’t plan for the day that their loan could convert into a permanent loan. So the bank terms allow their loan to convert from an interest only loan into some form of a loan with amortization — meaning that over the course of the next several years, the balance of the loan will be paid off.
We don’t quite know what loan terms they have that would cause their payment to go to $1,900 per month, unless the loan payoff period is shorter than five years or that amount includes other amounts to the lender.
Your kids would be well advised to seek some financial help from a mortgage broker or lender and see if they offer any suggestions for alternatives to refinancing their equity loan.
Having said that, if your son-in-law is self-employed and your daughter is employed as well, it appears they have had the means to pay their housing expenses in the past, including their loan payments, real estate taxes, insurance and other related expenses. The issue might not be having cash to pay their expenses but rather how he runs his business and what income he reports to the IRS.
A good mortgage lender or broker can help them go over their expenses and try to work with them. There may be a loan product that can help. Keep in mind that lenders know that some businesses have large amounts of deductions and depreciation that reduce income, but they recognize that those businesses have good cash flow. Some lenders, especially with second home loans, have the ability to portfolio the loan — that is to keep the loan on their books — and give borrowers like your kids an opportunity to refinance that second loan.
Now, if your kids’ home is underwater, they may have difficulty refinancing the loan through traditional means. They might qualify for refinancing through the Home Affordable Refinance Program (HARP) at www.MakingHomeAffordable.gov.
Before you turn over your hard-earned money to your kids, let them do some of the legwork and investigate their options. Certainly, they should have known this was coming and should have planned for it. On the plus side, at least from our take on the information you mentioned, it appears that quite a bit of the payment on their loan will pay down that debt. It will force your kids to save and transfer money from one place on their household budget to paying down their equity loan.
Your kids should probably do that before you sell your retirement securities to put funds into their home equity.
Ilyce R. Glink’s latest book is “Buy, Close, Move In!” If you have questions, you can call her radio show toll-free (800-972-8255) any Sunday, from 11 a.m. to 1 p.m. EST. Contact Ilyce through her Web site, www.thinkglink.com.