Best Options If Income Drops While Having a Low Payoff Mortgage?

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I had been making accelerated payments for several years and at this rate, my home mortgage is only a few years away from being paid off.  However, I may need to leave my job and go on disability retirement at a much reduced income level before I get it fully paid off. Loan payoff amount is under $50K

What are the best options?
Pay off  loan balance by emptying savings?
Refinance low loan balance while still employed so I have super low payments after leaving employment?
Sell house and buy lower priced home for cash (in a lower cost of living state) despite losing realtor fees, home fix-up costs to prepare for sale, closing costs, moving expenses etc,?

Without a mortgage, I estimate the monthly fixed costs of property taxes, insurance and HOA to be about $500 per month at my current home.  The other housing-related expenses would be utilities (gas, electric, water, garbage, internet/economy basic cable plus a healthy $200 per month fund for saving for home repair/maintenance (future $10K HVAC replacement and other repairs as the place ages) would total about $500 so total housing expenses should be a bit under $1000 per month all inclusive.
I can rent the spare bedroom to a lodger for $500, so my net cost for housing could be as low as $500 per month without moving if the mortgage was paid off.
If I refinanced the loan balance, I would have to add the mortgage payment to that cost.
I expect to net about $2000 monthly income plus medical insurance from the disability pension.  In another 15 to 20 years, I could apply for social security and have that income too and not deal with having to rent the spare room any more at that age.  I think I should be set for life then as long as I don't have any long term care expenses.

If I move to a cheaper state where I can buy a lower priced home for less than the cash I would net after a home sale, I would lose my regional HMO coverage and have to choose a PPO where I could pay up to $5000 in copays out of pocket plus another $2000 in prescription costs annually in a worst case scenario.

In the described scenario, what are the best options?

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This is why you spend your heloc once you are approved. Once it is spent, they can't freeze anything or force you to r... (more)

stealorama (Jul. 23, 2016 @ 1:27p) |

If I want the ability to come up with $100k cash in a day or two, a HELOC is mighty Handy.  There are endless reasons wh... (more)

CowbellMaster (Jul. 25, 2016 @ 1:25p) |

Yes, recast the mortgage.  There may or may not be a small fee but it's worth it for the breathing room.

FreddyPharkas (Jul. 25, 2016 @ 2:09p) |

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I don't know there is a "best" option, there's too many personal factors in play that makes the answer unique for each person. 

The only thing I'd add is the option of just continuing to pay the current mortgage, even if the payments partially come out of your savings.  How much of your savings would paying off the mortgage consume?  Because you can use cash to pay for emergencies, but you'd have to wait to sell your house if that cash had already been used to pay off the mortgage.  The only reason to refinance is if the interest rate will be significantly lower, but that really has nothing to do with your situation.

Can you move to a cheaper place within your regional HMO coverage area?

What is the interest rate on the mortgage?

What is the general size of your savings and what rate of return can you expect (based on how it is invested)?

Drop mortgage payments to scheduled payments for now. Preserve and maximize savings / emergency fund unless it may affect any disability financial aid available. Depending on the nature of the disability, financial aid may be possible or at least a disability related group may be better able to council you about future planning.

Depending on the disability and how much you care to go thru appeals, you may be able to get social security paperwork started when the disability becomes official. Social Security has a reputation for denying disability and making you take them to court. Royal PIA process.
Will the disability enable you to stay in the home for a long while (health status)
Refinance low loan balance while still employed so you have super low payments after leaving employment? Maybe depending on current interest rate verses the interest rate you can get on new loan adjusting for closing costs. Personal choice. I elected to get to point house is debt free.
While this is still an option, IF you have reason to believe you will not remain in the job, you have a moral if not legal obligation to say so to the lender. IF your employer knows of this possibility, there is a risk of the employer so indicating on the employment verification form.

I have been making extra principal payments for several years and that has thrown off the payoff schedule, so I will have to call the finance company to find out how many payments I would have left if only made minimum payments.
The payment would be $1600 per month including escrowed taxes and insurance so on a $2000 income, I would only have $400 left per month to cover all other monthly expenses.
If I had to take $1000 out of savings every month to meet expenses after making these payments, my bank account would be empty in less than 5 years.

I just looked at my previous mortgage statements and I think the loan would be paid off in less than 40 months even if I only made minimum payments.
So, I could possibly get the mortgage paid off before emptying my saving by pulling $1000 out of savings each month. However, my reserve cash would be very low near the end and that doesn't account for unexpected expenses.

Ya ... that puts a different light on it. In most cases the scheduled monthly payment never changes ... just the effect of the extra cash you have been tossing on the loan payments.
One other thing that I forgot to mention YMMV by state or government level. In my state disabled people get a home owner occupied real estate property tax discount. It can take up to a year for the benefit to take effect. Talk to your local officials. 
Also when the disability takes effect, talk to your local city officials.  You many qualify for the "handyman" programs that get you a very reasonable labor rate for home repairs and maintenance.  Many of the disability related agencies have similar programs.

Wouldn't you still have the border at $500 per month your your income would really be $2500?

What's the loan payoff?

fwuser12 said:   Can you move to a cheaper place within your regional HMO coverage area?

What is the interest rate on the mortgage?

What is the general size of your savings and what rate of return can you expect (based on how it is invested)?

I have about $5oK in savings and around $50K loan payoff on the mortgage.
I already live in one of the lower hosuing cost areas in the state.  There are cheaper areas to move to, but not significantly unless it is a very undesirable/unsafe area.
Current mortgage interest rate is around 3.5%.
 

  

Why not open the largest Heloc that you can on the house while you are still employed, pay down some with the savings and not worry too much about it?

You can then play the 0% balance transfer game to pay off the heloc and draw as needed to pay them back keeping your interest cost extremely low.

JW10 said:   Drop mortgage payments to scheduled payments for now. Preserve and maximize savings / emergency fund unless it may affect any disability financial aid available. Depending on the nature of the disability, financial aid may be possible or at least a disability related group may be better able to council you about future planning.

Depending on the disability and how much you care to go thru appeals, you may be able to get social security paperwork started when the disability becomes official. Social Security has a reputation for denying disability and making you take them to court. Royal PIA process.
Will the disability enable you to stay in the home for a long while (health status)
Refinance low loan balance while still employed so you have super low payments after leaving employment? Maybe depending on current interest rate verses the interest rate you can get on new loan adjusting for closing costs. Personal choice. I elected to get to point house is debt free.
While this is still an option, IF you have reason to believe you will not remain in the job, you have a moral if not legal obligation to say so to the lender. IF your employer knows of this possibility, there is a risk of the employer so indicating on the employment verification form.

  I don't think I can get SSI disability at the same time as collecting a disability pension so I may need to wait for full retirement age for social security.  Plus I think regular social security would be more income than SSI payments,.

App-o-rama credit card games and checking account sign up bonus rotation only goes so far. But I do agree a nice supply of credit cards now is wise if used wisely.
At some point, robbing Peter to pay Paul has to end.

superdrew said:   Wouldn't you still have the border at $500 per month your your income would really be $2500?

What's the loan payoff?

Yes as long as I can keep the room rented,  I figure it would be vacant at least one month per year.  Can't rely on 100% occupancy every month every year.  
It would still be tight with a $1600 monthly mortgage payment until the loan is paid in full .
There is less than $50K left to payoff.

It sounds like moving isn't an obvious smart move. If you've ruled it out, I would definitely pursue refinancing (maybe a small rate drop, but a big term extension for sure to lower payments) and opening a HELOC. Both may just add to expenses if you move and close them within a year or two. Make your move soon either way, those and new or increased credit card lines will be much harder to come by once your income drops.

And to digress a little, your case has me thinking of course about the Do You Pay Extra On Your Mortgage question. I think you'd be in a much better position now with a $50k larger mortgage and savings $70k larger. People often frame the early payoff as a conservative option, a guaranteed return of roughly whatever your mortgage rate is. But I think you're showing again that it's actually the gambler's option. It's a big bet that you'll be OK if you lock up all that money where it won't be quick or cheap to get it back over the next 10, 20, 30 years. Many people do get through that just fine of course, but I'm not willing to take that bet. Especially since when you are considering decent size time periods like that, cheap index fund investing will almost definitely outperform a normal mortgage rate.

web1b said:   I have been making extra principal payments for several years and that has thrown off the payoff schedule, so I will have to call the finance company to find out how many payments I would have left if only made minimum payments.
The payment would be $1600 per month including escrowed taxes and insurance so on a $2000 income, I would only have $400 left per month to cover all other monthly expenses.
If I had to take $1000 out of savings every month to meet expenses after making these payments, my bank account would be empty in less than 5 years.

  I'm confused - one option is to just use your savings to pay off the mortgage.  Your bank account will be empty tomorrow if you do that, so why is it potentially being empty in 5 years a problem?  Continuing to make the regular payments will let you keep some liquidity available, in case there are issues transitioning to your new income or other unexpected emergency.

Not to get too personal, but is there any work you could do with your disability? Even just a few to several hundred a month in additional income would seem to make a big difference. Uber driver, part-time internet work from home options, etc.

How disabling is your disability? Will it get worse? How much equity can you get out of your house if you sell it?

Maybe consider renting in a lower cost of living area. You should be able to find many parts of the country where you can get a 1 bedroom for under 1k/month. Put all the equity you get out of your house into an investment fund.

What is the term left on the mortgage? If it is significantly longer than the 40 months that you estimate that it will take to pay it off, then I've got a suggestion for you:
Contact the lender and ask them about re-casting or re-amortizing the loan. Navy Federal allowed me to do this some time ago on my second mortgage. They charged me $300 and also lowered the interest rate at the same time. Others on fatwallet have stated that Bank of America and Wells Fargo have allowed this.
https://www.fatwallet.com/forums/finance/1453213/

What's the equity you have in the property now?

SlimTim said:   It sounds like moving isn't an obvious smart move. If you've ruled it out, I would definitely pursue refinancing (maybe a small rate drop, but a big term extension for sure to lower payments) and opening a HELOC. Both may just add to expenses if you move and close them within a year or two. Make your move soon either way, those and new or increased credit card lines will be much harder to come by once your income drops.

And to digress a little, your case has me thinking of course about the Do You Pay Extra On Your Mortgage question. I think you'd be in a much better position now with a $50k larger mortgage and savings $70k larger. People often frame the early payoff as a conservative option, a guaranteed return of roughly whatever your mortgage rate is. But I think you're showing again that it's actually the gambler's option. It's a big bet that you'll be OK if you lock up all that money where it won't be quick or cheap to get it back over the next 10, 20, 30 years. Many people do get through that just fine of course, but I'm not willing to take that bet. Especially since when you are considering decent size time periods like that, cheap index fund investing will almost definitely outperform a normal mortgage rate.


The alternative would be the other way around. If you're doing it to hedge liquidity the savings will yield less than the mortgage rate and the extra savings would be lower than the difference in mortgage balance.

BostonOne said:   Not to get too personal, but is there any work you could do with your disability? Even just a few to several hundred a month in additional income would seem to make a big difference. Uber driver, part-time internet work from home options, etc.
I don't know what the long term outlook is yet.  I'm just planning for worst case where I would be completely unable to work.  I will know better in few weeks.
It's possible that there is treatment that will work and I would recover enough to not need to stop working permanently, but I need to plan for the worst case of being unable to work and  end up having to live only on the disability retirement income.
 

daw4888 said:   How disabling is your disability? Will it get worse? How much equity can you get out of your house if you sell it?

Maybe consider renting in a lower cost of living area. You should be able to find many parts of the country where you can get a 1 bedroom for under 1k/month. Put all the equity you get out of your house into an investment fund.

  I could sell and rent a 1 bedroom apartment, but it doesn't seem to make sense when, with a lodger, I could stay where I am for a bit more temporarily and in a few years the mortgage would be paid in full and then my housing expenses for the rest of my life would be less than renting an apartment.

superdrew said:   Why not open the largest Heloc that you can on the house while you are still employed, pay down some with the savings and not worry too much about it?
How does that work?
Do I get a Heloc for $50K and pay off the mortgage as a lump sum and then make smaller payments to pay off the Heloc or do I bank the Heloc and just pull from it each month to subsidize monthly payments on the mortgage until the mortgage is paid off?
What would be the best plan to pay off both the mortgage and the Heloc?

web1b said:   
superdrew said:   Why not open the largest Heloc that you can on the house while you are still employed, pay down some with the savings and not worry too much about it?
How does that work?
Do I get a Heloc for $50K and pay off the mortgage as a lump sum and then make smaller payments to pay off the Heloc or do I bank the Heloc and just pull from it each month to subsidize monthly payments on the mortgage until the mortgage is paid off?
What would be the best plan to pay off both the mortgage and the Heloc?

  That'll depend entirely on the rate spread between the two loans.  There's no reason to draw a HELOC to pay down the mortgage (beyond the required monthly payments) if the HELOC rate is higher than the mortgage.  

Likely the best plan, based solely on the info you provided, would be to use your savings to pay down the debt, and use the HELOC with a zero balance as your "savings account" for emergencies you don't have the cash to cover.  You typically don't want to rely on a revolving credit account as an emergency fund, but it's rare for a HELOC in the first lien position to end up frozen entirely (absent other shenanigans).

This is why you don't accelerate paying down an incredibly cheap loan. Better to have liquidity with a tiny amount of interest than to have a free and clear house and be stuck when a financial meteor hits.

HELOC is a nice idea but you're at the mercy of the bank who can shut your line down anytime they'd like.

Hop in your Delorean and tell yourself to make minimum payments on the mtg and invest the rest, then you'll be golden.

CowbellMaster said:   This is why you don't accelerate paying down an incredibly cheap loan. Better to have liquidity with a tiny amount of interest than to have a free and clear house and be stuck when a financial meteor hits.

HELOC is a nice idea but you're at the mercy of the bank who can shut your line down anytime they'd like.

Hop in your Delorean and tell yourself to make minimum payments on the mtg and invest the rest, then you'll be golden.

I could take the HELOC loan and put cash in an account so I don't have to worry about the account being closed. 
However as long as all bills continue to be paid on time and the credit score doesn't drop, I don't see why they would just randomly shut down the HELOC.

CowbellMaster said:   This is why you don't accelerate paying down an incredibly cheap loan. Better to have liquidity with a tiny amount of interest than to have a free and clear house and be stuck when a financial meteor hits.

.

a tax deductible tiny amount of interest

CowbellMaster said:   This is why you don't accelerate paying down an incredibly cheap loan. Better to have liquidity with a tiny amount of interest than to have a free and clear house and be stuck when a financial meteor hits.

HELOC is a nice idea but you're at the mercy of the bank who can shut your line down anytime they'd like.

Hop in your Delorean and tell yourself to make minimum payments on the mtg and invest the rest, then you'll be golden.

  A bank cannot shut down a HELOC on whim, it's usually restricted to specific reasons like LTV or a demonstrated inability to repay.  In a first lien position it's rarely if ever an issue.

Glitch99 said:   
CowbellMaster said:   This is why you don't accelerate paying down an incredibly cheap loan. Better to have liquidity with a tiny amount of interest than to have a free and clear house and be stuck when a financial meteor hits.

HELOC is a nice idea but you're at the mercy of the bank who can shut your line down anytime they'd like.

Hop in your Delorean and tell yourself to make minimum payments on the mtg and invest the rest, then you'll be golden.

  A bank cannot shut down a HELOC on whim, it's usually restricted to specific reasons like LTV or a demonstrated inability to repay.  In a first lien position it's rarely if ever an issue.

Sounds good in theory, but they can absolutely shut it down on a whim. My HELOC was shut down in 2009 for reasons unrelated to the terms of our agreement. Besides not paying, the only right they had to freeze the line was because of a decline the value of the 'real property,' i.e. my condo. When they froze the line, they said it was because their model showed values in the neighborhood were declining. It was BS and also not a valid reason to freeze the line. Besides having about 40% equity, the value of my property was stable and I had exact comps (it was a condo) that proved it. Didn't matter. I asked them to appraise my property. They refused. I asked what the LTV needed to be to reopen the line, they wouldn't tell me.

I asked a lawyer about it and they said that I was absolutely in the right, but that I couldn't do anything about it because there was an arbitration clause in the contract.

How much is the house worth? What does rent cost where you live? Are there other cheaper houses where you live?

Re-amortizing the loan is one good suggestion already given above. That might significantly lower your payments depending on when you bought and how much extra principal you've been putting in.

BostonOne said:   
Glitch99 said:   
CowbellMaster said:   This is why you don't accelerate paying down an incredibly cheap loan. Better to have liquidity with a tiny amount of interest than to have a free and clear house and be stuck when a financial meteor hits.

HELOC is a nice idea but you're at the mercy of the bank who can shut your line down anytime they'd like.

Hop in your Delorean and tell yourself to make minimum payments on the mtg and invest the rest, then you'll be golden.

  A bank cannot shut down a HELOC on whim, it's usually restricted to specific reasons like LTV or a demonstrated inability to repay.  In a first lien position it's rarely if ever an issue.

Sounds good in theory, but they can absolutely shut it down on a whim. My HELOC was shut down in 2009 for reasons unrelated to the terms of our agreement. Besides not paying, the only right they had to freeze the line was because of a decline the value of the 'real property,' i.e. my condo. When they froze the line, they said it was because their model showed values in the neighborhood were declining. It was BS and also not a valid reason to freeze the line. Besides having about 40% equity, the value of my property was stable and I had exact comps (it was a condo) that proved it. Didn't matter. I asked them to appraise my property. They refused. I asked what the LTV needed to be to reopen the line, they wouldn't tell me.

Was it a first lien?

I asked a lawyer about it and they said that I was absolutely in the right, but that I couldn't do anything about it because there was an arbitration clause in the contract.

 Um, it sounds pretty clear there was something you could do about it - file an arbitration claim. 

This is why you spend your heloc once you are approved. Once it is spent, they can't freeze anything or force you to repay. Why people get a heloc set up but don't spend it is beyond me. It's pointless unless you actually spend it.

stealorama said:   This is why you spend your heloc once you are approved. Once it is spent, they can't freeze anything or force you to repay. Why people get a heloc set up but don't spend it is beyond me. It's pointless unless you actually spend it.

If I want the ability to come up with $100k cash in a day or two, a HELOC is mighty Handy.  There are endless reasons why you might want the ability to do so, without having an expressed need in the short term, or possibly ever.

There's also the thought that a line, which shows up on public searches as an obligation in the full amount of the credit line, is a benefit in and of itself for a couple reasons.  Imagine you have a free and clear $400k house.  Individuals with intentions of various levels of malignancy may find this information highly attractive.  Generally those with paid off houses have substantial assets.  Maybe they will slip and fall on your property?  Less nefarious but also damaging, maybe you decide to sell your home; a prospective buyer's agent will tell their client, "hey he's got NO mtg, you can bid pretty low as he has nothing to pay off!"

Counter that with a house that has a large HELOC.  Most public searches would show the credit line as the lien amount, even with a $0 balance.  

Ultimately, these aren't great threats, but they are real negative possibilities, and when the vast majority of HELOCs cost $0 to obtain (most have 2 or 3 year clawback periods if you close in that time), there's little reason not to get the biggest HELOC you can.

tl;dr: HELOCs can make you seem less baller and ergo a less attractive Target to those that go digging for that kind of info.

jerosen said:   
Re-amortizing the loan is one good suggestion already given above. That might significantly lower your payments depending on when you bought and how much extra principal you've been putting in.

   
Yes, recast the mortgage.  There may or may not be a small fee but it's worth it for the breathing room.



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