Possible to get Mortgage Principle reduction?

Question

I have an upside down mortgage (bought at 415K, now worth 220K) and want to keep my home as a rental, but need to get the payment down to afford an addition place for me to live. My payment on my mortgage is roughly $2400, which is being thrown away cause of the value of my home. If I were to contact my bank and ask for the principle balance to be reduced to the current market value, would it work? Or should I threaten to walk away and dump this property?

Answer 1

They aren't going to let you do that with an investment property, period.  The bank isn't going to take a loss so you can go buy something else....think for a minute how ridiculous that sounds.

You can threaten to walk away if you want to...but don't think for a second that will end your financial obligation.  If all they can get is $220K out of the property in a foreclosure sale...do you think they will take a loss on the rest?

Nope, on a $200K loss they will get a deficiency judgement against you that is renewable for LIFE, which will essentially bar you from ever purchasing another home until it's paid off.  

I know of three people in the last 7 months that have tried to bankrupt that type of judgment and the bankruptcy court DENIED it.

Answer 2

Asking for a principle reduction is very unlikely to work. I haven't heard of it being done.

If you "walk away," the lender will foreclose. That'll severely hurt your credit and make it difficult/impossible to purchase another place to live for years to come.

You can ask the lender for "forebearance" or a loan restructuring. And you can certainly ask for a reduction on the interest rate, though it looks as though you've got a fairly decent one.

Your payment on your mortgage isn't being "thrown away." First, consider: You do need some place to live. Let's assume you went out today and simply wanted to rent a home similar to yours. You'd have to pay something. Probably you'd be paying about $1,600, plus or minus a couple of hundred. Right? You'd still be responsible for utility payments, just like you are today.

However, depending on your tax bracket, the amount of your mortgage, and your income, you're getting a tax deduction for the interest and taxes you pay. Since you bought fairly recently (around 2006, I'd guess), most of your payment is still interest. Maybe around $2,000 a month out of the $2,400 is interest and taxes. That's a tax deduction of $24,000 a year. If you're in the 30% tax bracket, that's saving you $7,200 in taxes. That works out to a tax benefit of $600 a month. So: subtract the $600 a month in tax benefits from your monthly mortgage of $2,400, and your net monthly cost of ownership is about $1,800. Compare that to the roughly $1,600 you'd be paying just to rent. Not a huge difference. Even less if rents in your area are $1,700 or higher.

In other words, your net cost of ownership, even being upside down, is approximately the same as renting. I know it bothers you that the value of the property has declined. But right now, that's just a paper loss. If you walked away, that'd be a real loss of credit, and of your future financial opportunities.

Just something to consider.

Answer 3

No it won't work, and it shouldn't.

You asked the bank for X number of dollars and they gave it to you.  You bought a house that has dropped in value.  Why is that their fault?

If you loaned a stranger $100 and he gambled it away, would he be off the hook simply because he bet on a bad horse?

Just stay in your house.  You don't "lose" anything until you sell for a loss.  

This isn't the banks fault and they're not going to write off half of their loan because you bought a house that sank in value.