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Thursday, November 17, 2016
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HOW TO GET OUT OF A BAD MORTGAGE?
Mortgages are something we often fight for. We’re looking around for the best possible mortgage we can get our hands on, and then, when we finally have it, we can’t wait to get rid of it.
Yes, it may be one of the most obvious examples of the paradoxical nature of finance, but here we are.
Mortgages are a great way to get into the house you’re dreaming about for you and your family.
However, finding a good mortgage deal depends on the way we strike a deal with the lender or bank that grants us the mortgage. If the mortgage is barely manageable, we might have a problem on our hands.
A bad mortgage deal is not the only thing that can get us down in the long run. Even if you get the best deal possible and have a credit score of 800 points, you might fall victim to unforeseeable circumstances down the line. The newest example being the housing crisis of 2007.
What is a bad mortgage?
The obvious answer to the question “How to get out of a mortgage?” is to pay it off. However, if you find yourself with a bad mortgage, this might not be so easy anymore. The phenomenon of negative equity has taken over the consciousness of many homeowners in the US.
Negative equity occurs when the value of an asset (in this case a house) is lower than the outstanding amount you owe on the loan given to acquire the house in the first place.
For example, you bought a house at a price of $200,000 and that house is suddenly worth only $120,000, your negative equity is $80,000.
So, you still have to pay the whole sum of $200.000 to pay off your loan, although the real value of the house is now much lower.
This is considered a bad mortgage because you are not able to pay off the mortgage even if you decide to sell the house. You would still owe $80,000 to the lender, which is probably not fair, but, on the other hand, inside the boundaries of the law.
How to get rid of bad mortgages?
If you’re able to pay off the loan as agreed upon, DO IT. This is the most obvious answer, but it is also the thing that will keep you in the green once you’re done with it. However, if the mortgage becomes unbearable, there are other solutions that you can use in order to get rid of a bad mortgage.
Walk away from the mortgage.
Yes, you heard me.
Walk away from it, and let the lender deal with the decreasing value of the property. This will of course force you to leave that house, but if you see no alternative, you should be prepared for this.
However, once you decide to do this, be aware that your credit score will go down by some 150 points immediately (use CafeCredit.com to check your free credit scores instantly).
This might do much more damage than walking staying with the mortgage, as no other lender will ever look at you the same way once you walk away from a mortgage you already signed.
The second solution is maybe a bit more awkward than simply walking away. TALK TO YOUR LENDER. See if there is a possibility to refinance the whole thing so everybody gets something out of it.
If a mortgage is granted due to be paid off in 35 years, for example, maybe it can be refinanced to prolong it to 45 years, for example.
In the best case scenario, you might strike a new deal with the lender, making it much more realistic in the current context you’re living. You might not get the deal you would get if you’ve been applying for a new mortgage, but at least you will take off some pressure from your current situation.
In the end, it is always better to strike a good deal, than to strike any deal. If a mortgage is not ideal, there’s sometimes little you can do about. However, if a mortgage is absolutely horrible, it’s better to be patient until a better deal comes along.
Posted by Shaun Stuart at 12:24 PM