Options sought in struggle to pay mortgage

Q: Our income requires two paychecks combined to meet our mortgage payment every month. Our credit is hurt because of past layoffs. We can't get our loan refinanced because of credit problems. We are in a financial crunch. What else can we do? Our mortgage is about the same as renting would cost. In other words, moving is not an option.
M.W., via e-mail

A: If you want to keep your house, but have trouble paying your mortgage, Nancy Ness Judy, of consumer financial education organization Myvesta, suggests you contact the lender and negotiate a deal.

Most lenders don't like to take back properties, and she believes that your lender would rather rewrite your loan, suspend principal payments for a while (have you pay interest only), reduce your payments, let you miss a few payments and spread them out over time, or give you an interest-free loan until you bring the account current.

If Fannie Mae or Freddie Mac hold your loan, you may have some extra good news. Both programs recently made radical changes to their home-loan default programs, emphasizing foreclosure prevention. They offer rate reductions, term extensions, and other loan modifications for people experiencing involuntary money problems.

If you fail to reach a deal with your lender, a mortgage broker might help. Brokers have access to hundreds of loans offered by banks, thrifts, and other mortgage lenders. They may be able to help you refinance and bring your payments down to an affordable level.

Finally, Ms. Judy says negotiating for a new loan or temporary suspension of payments may not help in the long run if you are living in a house you simply cannot afford. Visit www.Myvesta.org for its free publication called, "What To Do If You Can't Pay the Mortgage."

Q: My 86-year-old mother-in-law issued a mortgage for $109,000 that was recently paid off. She still has a $50,000 mortgage on her primary home. She wonders if she should now pay off that mortgage this year or wait until next year. Also, what is her capital-gains liability on the $109,000 she received from her investment home?
C.F., via e-mail

A: If your mother needs the sale money to meet her cash-flow needs, then she shouldn't pay the note off, says Virgil A. Folden III, a certified financial planner in Fredericksburg, Va. If not, she should pay off her mortgage and save the former mortgage payment each month.

Secondly, how much interest would she save by paying off her mortgage early? If the loan is close to maturing, the interest portion of her payments may be so low as not to be a major factor. But Mr. Folden's personal philosophy is always to be out of debt if possible.

As to capital-gains tax, there should have been a calculation in the year your mother financed the buyer's purchase of her property that determined her gross profit percentage on the sale. This percentage is applied to the remaining loan balance she received this year. If these proceeds were received after May 5, 2003, the new capital-gains rates apply, either 5 percent or 15 percent, depending upon her taxable income. Any depreciation taken earlier will be taxed at 25 percent.

Here's an example on the sale of a $109,000 home that cost, say, $40,000. Her $69,000 profit is subject to the 15 percent capital-gains tax, for a bill of $10,350. But if she previously wrote off any depreciation, she also has to plug that amount back into the formula, and the tax rate there is 25 percent. Mr. Folden strongly recommends that your mother-in-law check with a tax adviser for specifics.

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