Comparing 2 Mortgage Options - How to decide?

[fairone1]

Last year I was unemployed for several months and fell behind on my mortgage payments.
My mortgage holder, Chase, has now offered me a HAMP mortgage and I've made 3 trial
payments and will very soon have to decide whether to accept this new mortgage or not.
Fortunately, earlier this year I found stable employment and have now saved enough money
to catch up with my arrears of approx. $9k (although I still owe Chase a further 10k for
property taxes that they paid on my behalf).
I'd like some advice in order to make a decision on whether to pay off my arrears
and stay with my original mortgage or to accept the new HAMP mortgage. Here are some
details in order to make a comparison:

Original 15 year mortgage
-------------------------
Monthly payment $1336
Interest rate 4.5%
Term remaining 47 months
Unpaid principal $65123
Monthly taxes $572
Hazard insurance $95
Total monthly payments: $2003 (including taxes and insurance)

New HAMP 7 year mortgage
------------------------
Monthly payment $1772
Interest rate 2%
Term 85 months
Total monthly payments: $1772 (including taxes and insurance)

I'm having difficulty understanding that even though the new mortgage has less than half
the interest rate of my original loan, if I take that option I'll be paying over $50k
more. I'd really like to stick with my original loan and have my house paid off within 4
years but how do I handle the 10k outstanding amount with Chase? Any suggestions?

Also, if I'm forced to go with the new mortgage how are extra principal payments handled?
The way I understand it interest is calculated up front and the reason that the above
higher interest loan is more attractive is that I am at the tail end of that mortgage and
principal is largely being paid as opposed to interest.

[autoxer]

I'm having difficulty understanding that even though the new mortgage has less than half the interest rate of my original loan, if I take that option I'll be paying over $50k more.

What's the principal amount on the new loan? They may make the rate seem attractive, but they are probably bumping up the principal due by $20k to cover the loan modification.

[sblatner]

Am I figuring this out correctly?

Original mortgage
47 months x 2003 = $94,141

HARP mortgage
85 months x 1772 - $150,620

Is the issue that $10k that you owe Chase for property taxes folded into the new loan and if you don't do the new loan, you'll have to come up with the $10k?

[fairone1]

autoxer:
They have a figure of $86579 for 'Unpaid Principal Balance' on the forms.
If I do a reverse calculation using the new monthly principal and interest payment of
$1093 (excludes $684 escrow and insurance to make up the $1777 monthly payment) over a
term of 85 months I get $86553 (close enough for me). So it doesn't seem that there are
any loan modification costs added (or only 1 - 2k) - just the $10k outstanding that I
owe them plus the $9k arrears.

sblatner:
Spot on - your calculation is correct and yes the extra $10k that I'd have to come up
with is the problem. I know I could use a high interest 'private lender' to come up with
that amount but I'd already have a tight belt with the $2003 monthly payments. This is my
dilemma - should I take this kind of risk to save the $50k or not?


This $50k still seems like a painful price to pay for missing several payments and not
being able to catch back up.

[autoxer]

autoxer:
They have a figure of $86579 for 'Unpaid Principal Balance' on the forms.
If I do a reverse calculation using the new monthly principal and interest payment of
$1093 (excludes $684 escrow and insurance to make up the $1777 monthly payment) over a
term of 85 months I get $86553 (close enough for me). So it doesn't seem that there are
any loan modification costs added (or only 1 - 2k) - just the $10k outstanding that I
owe them plus the $9k arrears.

sblatner:
Spot on - your calculation is correct and yes the extra $10k that I'd have to come up
with is the problem. I know I could use a high interest 'private lender' to come up with
that amount but I'd already have a tight belt with the $2003 monthly payments. This is my
dilemma - should I take this kind of risk to save the $50k or not?


This $50k still seems like a painful price to pay for missing several payments and not
being able to catch back up.

That doesn't save you $50k, because you are forgetting that you would still owe $10k plus what ever the high interest 'private lender' wants. So at best, that might save you $30k - $35k, but that would put a lot more pressure on your cash flow. Do you have to pay the $9k to chase before the loan will be modified, or does that just get rolled into the new loan and allow you to hang on to what you have saved up?

[sblatner]

Also, if you do do the modification, it doesn't mean that you can't pay it off earlier. You can continue with paying the $2,003 per month or even more and pay it off earlier so the interest you pay is not $50k.

Also, autoxer is correct about the $10k. It really isn't $50k more. You are essentially financing and paying interest on the $10k instead of paying it up front.

You can play with an amortization calculator to see how much extra payments lower your total interest.

http://www.amortization-calc.com/

If you do the calculator, you will see that you pay mostly interest up front and hardly principal. On your current mortgage, you have already paid quite a few months so you are paying a lot of principal.

If you do refinance, you will be starting over but that might be what you have to do.

[fairone1]

Yes Autoxer, the 9k gets rolled into the loan so I'd hang onto my savings.

Again you guys/gals are right. This forum is making me think clearer.
If I use a 10% interest rate (totally arbitrary) over a 7 year period for the 10k, I come
up with $13,944 principal+interest for the $10k amount. If I add that to the $94,141
above it equals $108085 and then subtract this from the $150,620 above, I get $42,535
lets say $40k (if I use 20% I then agree with Autoxer's estimate of $30-$35k).

Sblatner, that fact that I'm at the tail end of my original 15 year loan and paying mainly principal now is the exact reason I am bothered about going with this new loan.

I'm not really comfortable with signing something with a hard money lender so I'm thinking now it's time to talk to Chase and see if they would let me pay the $10k back over say 15 years (to keep the payments around $100 (just guessing)) and stick with my original loan and live with a tight cash flow. I'm guessing they will look at my gross income (a bit over 5k per month) and say NO and effectively force me to take the new loan.

Any other suggestions/ideas/comments?

[sblatner]

Not at this time. Call Chase, see what they say and let us know.

[autoxer]

If you took the new loan and paid an extra $500 each month, then you'll pay it off in less than 5 years. And you get to keep that $9k in your savings account as an emergency fund.

Also, if you look at the amortization, with the old loan, $65k @ 4.5% interest, is about $244 each month going towards interest. With the new loan $86k @ 2% interest, that is about $144 going towards interest each month. There is a big penalty added for missing those payments, but they are offering you much better cash flow, so that you don't have that problem again. If you try to stick with the original chase loan, you will still owe $65k + $9k arrears + $10k taxes. So the penalty for modifying the loan is only ~$2k and they are giving you a much better interest rate. Stretching it out to 7 years, instead of 4 just helps your cashflow, but it doesn't seem that bad.