Debt

New And Improved!!

Posted by Jean

Okay, so you don’t usually get a headline like that on a financial story unless it’s an out and out scam.  Today is different.  Two things I want to tell you about may actually help you get through this month (and those following) feeling less squeezed than in the months before.

1. 125% Loan To Value

One of the big frustrations I’ve heard about — from some of you indeed — in the attempt to refi a mortgage because you’re feeling squeezed by the payments is the inability to qualify for the Making Home Affordable plan.   As originally drafted, it was tough.  Your loan not only had to be underwritten by Fannie or Freddie but you could owe no more than 105% of the appraised value of the home.  Due to the fact that people overborrowed to such a great extent and home appraisal values had fallen similarly, that was a high bar to scale.  Well, it’s been revised.  Now you can owe up to 125% of the appraised value.  CNBC covered the story pretty comprehensively here.  The bottom line: If you’ve tried and failed, try again.

And note: Mortgage rates fell again this week.  The 20-year-fixed rate loan is back at about 5.3%.

2. Income-based student loan repayment

This morning’s New York Times has a chilling — and infuriating — story about a guy who is being blocked from joining the bar and practicing law (even though he passed the exam) because the committee doesn’t believe he’s made enough of an effort to repay his $400,000 student loan debt.  Let’s just acknowledge that the debt is out of control.  In part that’s because he doesn’t seem to have attempted to dig out.  In part it’s because he seems to have had a medical issue that pushed his loans into deferment which added another $100,000-plus in interest alone to his total.  (This, by the way, is a big problem with deferment.  I ran some numbers and deferring a $40,000 debt for three years can leave you with a  $51,000 tab.)

Let me just say, however, I’ve seen worse.  And one of the big reasons people take on so much in student loan debt is because they believe — or perhaps believed is the better tense — that big salaries would automatically follow.

But what if they don’t?  The income-based repayment option on federal loans, new July 1, from the government can help.  It’s available to people if their student loan payments are equal to more than 15% of their discretionary income.  (That’s defined as the amount by which your income exceeds 150% of the poverty line for your family size.)  Anything you don’t pay because your payments are cut will be tacked onto the end of your loan.  If you haven’t paid off the entire balance at the end of 25 years, anything remaining will be forgiven.  To figure out if you can benefit, use this calculator at finaid.org.  (Note, they also have a calculator that can show you how a deferment can add up.)