Under construction

After much hassle and bureaucratic hoop-jumping, the credit union finally let us know on Friday that we got the desired loan modification on the downtown house M’hijito and I are copurchasing.

That will help a great deal. It drops the mortgage payments from something over $1400 to about $1,085 a month. This comes as M’hijito’s roommate is talking about leaving (an on-again, off-again proposition). Roommate’s rent payments have been modest, but he’s also been paying all the utility bills, which, because the house is a sieve and because Roommate is home during the day, can be very high in the summertime.

It means that if and when Roommate leaves, M’hijito should have no trouble continuing to pay his half of the mortgage. Meanwhile, as long as the rent continues to come in, we can either stash the extra $300 savings to cover repairs and upkeep on the house (which is what M’hijito is already doing with the rent income) or we can use it to pay down principal.

My part of the mortgage payments comes out of a nontaxable fund of cash retrieved from an ancient whole life policy. If we do nothing at all, it means we now have enough to cover almost 18 months’ worth of bills instead of only a year’s worth. If we manage the money intelligently, we may be able to engineer something better.

What we really needed—and what I asked for, in the nothing-ventured-nothing-gained department—was a cut in the principal on that loan. We need to have the principal reduced to something closer to the house’s actual value. If you believe the ever-reliable Zillow, the place is now worth about $52,500 less than we owe on it.

In about 11 years, the loan will spawn a balloon payment: at that time, we will have to pay off the balance, refinance, or sell.

I will be very surprised if the house is worth what we’re paying for it 11 years from now. Under the original 30/15 terms (interest is figured on a 30-year basis, but the loan comes due in 15 years), by the end of the 15-year period the principal would have dropped to about what Zillow says the place is worth today. This mortgage modification will change that: to engineer the drop in payments, the credit union not only is dropping the interest rate to 4 percent, it also is prorating the loan over 40 years. Thus in 15 years we probably will owe more than we originally calculated (because principal and interest payments are both lower), unless we use the $300 a month savings to knock down principal now.

But we’ll have to cross that bridge when we come to it.

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