My parents took out a home equity loan in 2013 and are still buried by it, any recommendations here for how they can best service or refinance the loan?
Three years to the day after the last short sale, we bought a brand new build in a much better area of the city with 5% down on a custom build. No bankruptcy required.
As the saying goes: If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem.
If you're ever deep in over your head financially, the smartest thing to do is to walk away. A mere year or two after filing bankruptcy, you can easily repair your credit to the point that you can get a mortgage or auto loan at a reasonable rate. Within seven years, bankruptcy or not, abandoned debt is off your credit history. Why suffer for a decade treading water paying down interest and penalties with no hope of ever getting rid of the principal if you can just hit reset?
I'm not saying it's right to rack up enormous debt on purpose and walk away when you have the means to pay, but people literally kill themselves from stress and suicide when they can just stop paying. If you tried to do the right thing and through no fault of your own (illness, injury, massive global disruption in the economy) you find yourself in an insurmountable position, don't feel bad. Just say no.
Of course they do, you are just a blip on the bank's radar. The decision to foreclose is a matter of business to them. So why can't borrowers do the same thing and essentially "foreclose" on the bank? Foreclosure is literally just cutting your losses. That's what the banks do all the time, so if they can do it, then why can't borrowers do it too? It is an excellent perspective.
https://www.quickenloans.com/learn/the-difference-between-re...
Once they have a better egg they can put back into a property if they wish, hopefully with the help of a smaller loan they can actually pay.
If instead, OC means that they can't keep up with the payments on the home, then that would mean the solution is simply to downsize to something that they can afford. Sell the house, pay off the mortgages, and move into a rental that is within their means.
The only reason that I say that the stock market is a bad idea is that if their parents can't manage the personal finances of a simple mortgage, then making intelligent decisions in the stock market is probably not a good option for them. I am not calling them stupid, but I am just saying that investing in the stock market intelligently is multiple magnitudes more complicated than managing your mortgage. Countless studies have shown that when laymen invest in the stock market, they usually underperform the index funds.
Yes, the stock market is down right now, which is the time to buy. But just throwing money at it, simply because it is down is far from a good decision either. Some stocks right now will likely not recover for a decade or longer and many will file bankruptcy. Some will profit wildly. The stock market is going to be very volatile, which means POTENTIAL for huge gains. But unless you are making these decision with absolute care and awareness to hide possible losses, you are essentially treating it like a lottery.
First, you can always re-finance. And right now is actually a good time to re-finance, because interest rates just dropped. They could get a low APR fixed-rate Mortgage right now if they can re-qualify. The benefit of re-financing is that you could combine your Home Equity Loan (which is usually higher interest than a traditional mortgage) and your outstanding mortgage into one new payment plan. This would be most likely at a much lower combined interest than your parents are seeing right now. Interest rates right now are exceptionally low with the pandemic, so locking in a fixed-rate mortgage at these low APRs will go a long way in helping your parents pay down the balance of the loan faster, while making the exact same payment as they are right now. This is because less of the monthly payment goes towards interest.
Second, make extra payments each month. Even a hundred bucks or so, adds up quickly. For example. Let's say they owe $200,000 on the home on a 3.5% APR loan. They probably make payments in the ballpark of $1,200 a month on that amount.
On these figures, they are paying approximately 0.3% interest each month on the principal ($200,000). That is $600 a month in interest. This could be even higher if you factor in a higher APR from the Home Equity Line of Credit (probably 4.5-5% APR, or 0.4% a month). That means the Home Equity Line might be paying as much as $800 a month in interest. Let's split the difference and say half the home value is under the Home Equity Line and the other half of the value is under the first Mortgage. That's $700 a month that goes towards interest. So of their $1,200 payment each month that leaves their bank account, only $500 actually goes towards their home.
As you can see, if they just wait until next month they will again pay $700 in interest and $500 towards principal (This scale crosses over time as you lower your principal). So if they instead increase their payment just $100 a month, from $1,200 to $1,300 then they still pay the same $700 in interest, but this time $600 will go towards principal. That is a 20% increase in the speed of paying off your home with just an extra $100 a month. That also means that your principal lowers faster, which in turn lowers your interest payments (since they are based off principal) for future month. This creates a positive "Snowball" effect for your parents, quickly accelerating the speed of home ownership with a very small (additional) sacrifice per month.
Under the same example, imagine if they put $200 more per month towards it. This would be paying the house principal off at $700 a month instead of $500 a month, a 40% increase! On a 30 year mortgage, paying an extra $200 a month could mean paying off your home more than A DECADE EARLIER! The effects are incredible.
Now imagine that they DON'T have an extra $100 a month. You can have the same effect by simply refinancing your home and combining both mortgages into a single, low APR mortgage, offered right now with low interest rates of the pandemic. They could secure a 2.6% APR loan combined across both mortgages.
On a 2.6% APR mortgage they would be paying only $433 in interest each month instead of $700 (assuming the same $200,000 outstanding balance figure as before). That is an additional $267 a month that goes towards the home principal each month by making the same $1,200 payment that they were already making before. So instead of $500 a month going to principal, they would be paying $767 per month towards principal. That is a 53% increase in the amount going towards paying off your home! All while making the same payment as they are already making.
Now for the grand finale, imagine that they re-financed AND they added $100 a month to their payment. This would mean they are paying off $867 a month towards their principal, which is 73% increase in their loan payoff. If they were to add $200 a month to their payment AND re-finance, it would be a 94% increase (which is nearly double).
Everyone's situation is unique. But I would highly recommend that you talk to your parents about re-financing. It doesn't always make sense to re-finance, but right now it makes A LOT of sense. Be sure to get a fixed-rate mortgage since rates are so low right now, you want to lock them in. And try to combine both mortgages. The bank will offer a lower combined interest rate and the temptation would be to pay the subsequent lower payment amount that the bank offers. Instead of paying that lower amount, convince your parents to pay the same they are paying now. This will essentially offer that extra payment amount that has such a significant impact on speed of loan pay-off. Any extra they can offer on top (even $50) goes a long way towards accelerating the loan payoff. In fact, you could even offer that they simply follow these tricks for 1 year and it could possibly get them at least out from under their loan in a year. Then they might still owe on it, but could resume a less-aggressive payoff model once they know they have plenty of positive equity on the home. They could settle back on the lower payment offered by the lower interest rate thanks to refinancing.