The Way It Was In 2006

You purchased your cabin in Big Bear in 2006 for $299,000.00  Loans were very easy to get at that time so you bought the cabin with as little as 10% down.  In an effort to keep the monthly payment nice and low, you chose the Adjustable Rate Mortgage, (ARM) over the 30 year fixed rate.  Fixed rate mortgages were 6 percent and the interest only ARM was only 4.5 percent.  The fact that the note would only give you three years at that low rate didn't concern you because you would simply refinance the loan when the time came.

 The Way It Is In 2009

Ok, the three years have come and gone and your mortgage has reset to a much higher interest rate.  The payment is too much for your budget so you look to refinance the mortgage.  You bought the cabin in 2006 for $299,000. You quickly learn that your Big Bear cabin isn't worth much more than $199,000.00!  You walk away from your Realtor somewhat speechless knowing that you have lost $100,000 in three years.  You can't refinance the $299,000.00 mortgage and you can't afford to continue paying the mortgage. 

 What are your options?

The fact of the matter is that you DO have some options.  Your first and most important option is that you need to call your lender and ask for help.  Explain the situation to the lender and ask for a loan modification.  Lenders don't want to foreclose on your mortgage.  They would much rather take a look at your situation and see what can be done to help you out.  I've heard of lenders who have taken what you're behind and moved them to the back end of the loan.  Some lenders are converting the ARM to fixed rate mortgages and others are dropping these high interest rates to much more affordable numbers.  But, unless you ask for help, you'll never know what the lender can do.

If you are unable to work out a home loan modification, then you must decide how to handle the financial mess that you're in.  Can you hold on to the property and ride it out?  If so, that is your best option.  If you can't afford to ride it out, then you need to choose whether to deed the house back to the bank in lieu of Foreclosure, Sell the house as a Short Sale, or wait it out and be foreclosed on.

While none of these options sounds like they would be much fun, selling the house as a short sale might be your best way to go.  The bank would rather you sell your home as a short sale and get whatever the house is worth than having to foreclose on it.

No matter what way you chose to go, always consult with a tax professional as you want to understand the tax ramifications.