My mortgage bank is offering me to pay my second loan at a reduced amount. Should I take it?

Deal Score0

Yesterday I got a letter from my bank, they are offering me to pay about half of my second mortgage loan and saying that, if I do it, “my loan will be considered payed in full”. They also say they will give me an IRS 1099-C form for the amount forgiven.

I have never been late in a payment but I have a terrible loan (balloon), I don’t trust my bank and I was considering refinancing soon (it might not be possible as my loan is higher than what my house is appraised for).

Should I take the offer? Will this inflate my income and kill me at taxes time? What questions should I be asking? Is it as good as it seems?

Professional advice is very welcome.
Ok, the answers up till now seem really good but I want to put a little bit more detail to see is it can help me get even better answers:

First Loan:
$ 189,000 30 years (5 years interest only)
6.5% APR for the first 5 year, then it will go up

Second Loan:
$ 45,000 30 years fixed
13% APR
***offered to pay only $ 20,000 to pay it off***

My loans total: $ 234,000
My house is now worth: about $ 220,000
My mortgage bank is Aurora Loan Services, just do a search for their company name online and you will know why I don’t trust them. I called them today and they said there was no more information that I could get, just the letter, that’s it. They were kind but not helpful at all and I have only 30 days to take the offer and send my money order… because they will not take a bank wire or any other more secure kind of payment.

  1. Reply
    David S
    February 16, 2011 at 6:08 pm

    Look for the cost of the loan and if its worth it.
    ask you self if you going to live in your house for more the 5 yrs and how much your loan ate will be??
    read the fine terms carfully .
    i do not think this is a final offer, it could be part of bank marketing , banks these days are looking hard in each loan.
    my best advice ,read, visit your local bank, and read take a deep look at your loan .
    good luck

  2. Reply
    Danny Noonan
    February 16, 2011 at 6:31 pm

    Take comfort in the fact that you’re definitely not alone in your situation. There are thousands of individuals/families that owe more on a mortgage loan than the house is appraised for due to the rapid decline in real estate values over the last couple of years.

    If you have a balloon only you know if you foresee that you will be capable of making payments going forward. If you don’t feel you will be able to make the payments going forward I would first exhaust the refinancing markets. Refinancing will be hard with an underwater loan, but not completely impossible. If you strike out there and cannot make the payments then you can consider the forgiveness (1099-C). The reason I would suggest the forgiveness as a last resort is due to the credit ramifications it may have on you.

    Keep in mind that debt forgiveness does not have to be reported as income to the IRS only if:

    1. Bankruptcy – the debt was already discharged through a bankruptcy proceeding.
    2. Insolvency – your total debts exceed your total assets at the time your debt was settled or deemed noncollectable.
    3. Indebtedness is due to a qualified farm expense.
    4. Indebtedness is due to certain real property business losses.
    5. Discharge of your debt was treated as a gift.

    When things are too good to be true in the world of finance, they are too good to be true. Trust your instincts. Nothing is free. You should take the offer if you need the offer to get by. If you can get by without it then don’t take the easy route.

    Usually third parties do this sort of thing so if you have your mortgage with the same bank that is offering you the forgiveness deal I would be interested in knowing what their incentive is to have you take the forgiveness deal when you are current on your loan at this point.

    Check out the link below for a bit more background on this issue.

  3. Reply
    February 16, 2011 at 7:19 pm

    The 1099 amount will be considered income by the IRS and you will have to pay income taxes on that amount.

    Balance the amount of taxes you have to pay on the 1099 against the amount of interest you would have to pay on the current balance of the second mortgage. If it is more than the taxes you will pay, take the offer. If the interest is less than the taxes would pay, then don’t accept the offer.

  4. Reply
    February 16, 2011 at 7:40 pm

    Why would they offer to take less than face value if you are not in default? suspicious sounding to me. You need to read the finer print 3X, have an attorney review it and have the offer- with terms in writing.

    As for refinancing, you may have an issue if property values have fallen in your area. Could be why they are offering the deal. If you an get permanent financing fixed rate of interest that is always better. Look into FHA but do it quickly as terms will be changing in early 2010 thanks to recent federal legislation changes. Plus side is there may be some relief tax wise that will allow you to take the deal and not owe in the reduced mortgage. If it is an offer to buy your mortgage at a discount that could be good and no different than selling it to another bank. So check it out, keep your eyes open and do what is in your best interest.

  5. Reply
    February 16, 2011 at 8:16 pm

    1st of all, banks make half their money on creating new loans. you have heard of closing costs. banks will try to little tricks. Its a play on words. They say all you will have to come up with for closing cost and points in cash is $ 500-$ 1,500. And the part that is true is all you have to come up with in cash. But the other $ 1,500-$ 2,500 is put into your loan. It counts a lot. 2,000 more in closing cost, whether you pay it up front, or pay it over time. you still pay it. That will cost you $ 120. more a year in interest.

    As for taking the loan, your objective is to get lower payments, and pay less interest. It sounds like your main goal should be to refinance both of your loans into one. If you had a down turn in income, the government has set a rule to help people with a down turn in income, or got a really bad loan. The government is trying to stop the rise in foreclosures. Now if you can get a new loan, that covers both of your other two loans, and get a 30yr loan, at around 5.5% that is very good. It still should not cost you more then $ 3,000 for closing costs. Just getting rid of the 2nd loan is not a good plan, unless you have a good interest rate on the first. Like 6%-6.5%. If you have a balloon payment coming up, or have an interest rate higher then 7%, You will need to refinance soon.

    Hope this helps.

  6. Reply
    Ryan M
    February 16, 2011 at 8:46 pm

    Yes you will get killed at tax time. That 1099 will be considered taxable income that you have NOT paid taxes on. For every $ 1,000 forgiven, plan on AT LEAST $ 200 extra tax liability.

  7. Reply
    February 16, 2011 at 9:13 pm

    Sounds like it could be a good deal for you. It could be open to negotiation. Talk about the possibility of getting everything into one loan, getting rid of junior lien, or about modifying your first mortgage as well.

    IF your house is worth less than the financed amount on the two mortgages, you can’t finance. 100% loans are a horrible idea, and a major cause of the foreclosure crisis, and no longer readily available. Thus taking this deal could be your only option, unless you can come up with some additional equity.
    A 1099C means you have to report the amount forgiven as income. This doesn’t happen on a first mortgage, but can on a second, or junior mortgage. You borrowed money, you aren’t paying it back, you got the benefit of that money, and now have to treat it as income. Depending on your income bracket, and the amount involved forgiven, this could be a catastrope come taxtime, or be largely irrelevant.

    Lenders are under pressure to show that they are working with their borrowers, and this letter is part of their effort to show the Prez they’re doing something, when they haven’t been in past. The lender is GIVING up on money you borrowed and legally owe them, writing it off.

  8. Reply
    February 16, 2011 at 9:19 pm

    You’ll pay income tax on the amount forgiven, but that’s a lot less than paying the total amount. Unless you’re figuring on letting the house go into foreclosure, sounds like a good deal.

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