Refinancing an underwater mortgage?

Refinancing a mortgage (question 3) and getting out from under backbreaking student loans (question 9) feature in today's reader mailbag.

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Building website skills
2. Which credit counseling service?
3. Serious mortgage trouble
4. Thermostats, nighttime temperatures, and kids
5. Shady credit union practices
6. Direct stock purchasing
7. Frozen interest rates?
8. Which debt to pay first?
9. Huge student loan debts
10. Company cuts 401(k) match

Somewhere during the last week or so, I picked up a pretty vicious cold. I’m not surprised – the stress level around here (with lots and lots and lots of things going on) has been pretty high.

I might just spend the afternoon drinking tea, eating some toast, and not doing much at all other than resting.

Q1: Building website skills
I’ve come up with a few website ideas that I think are really good.

The problem is that my developer skills are both incomplete and rusty. I took a basic web design class in high school (10 years ago), and a couple basic programming classes in college (6 years ago).

The only way I can think to learn this is to take some courses at a community/technical college. But I have no money to put into it. Are you aware of any free resources (books I can probably find at the library, online resources) to learn how to build a functional website?
- Julia

It really depends on what you’re trying to build.

If you’re trying to start a blog, the content matters way more than the design does, especially at first. Just start a blog at blogger or WordPress and get started with one of the default templates. If it takes off, then invest the money and get someone who can actually design a template do the work for you (I did my own here, but I will probably revise it soon with some help).

If you’re thinking of something else – a static site, or something like that – you have a couple of options. You can stick to something really basic and teach yourself using online web documentation, but there’s a bit of an upper limit on what’s feasible if you’re approaching this from an “on the side” angle. On the other hand, you could simply get a copy of Adobe Dreamweaver and learn how to use that.

Q2: Credit counseling services
A recent posting mentioned Consolidated Credit Counseling Services. If you were thinking of using a service like that, which one would you use?
- Kathy

I don’t recommend any particular credit counseling services, as I don’t have experience with enough of them to recommend any. However, I can tell you what I would look for in such a service if I were looking for one.

I would start with my state’s Consumer Protection Office and ask for a list of recommended agencies – i.e., ones that are in good standing with the state. I would make sure that they’re affiliated with the NFCC or the AICCCA, meaning they’re at least accreditable to some larger entity. I would meet with at least a few of these agencies and determine which ones meet my needs. Ask them for a full disclosure of all of their fees.

Remember, though, with credit counseling, the odds are not in your favor. According to Liz Weston, only a third of people who meet with credit counseling services wind up in their program, and those programs have a 45% dropout rate. You have about a 1 in 6 chance of actually being helped from a consumer credit counseling service.

Q3: Serious mortgage trouble
My nephew and his girlfriend are in deep trouble with their mortgage and finances. They bought a house for $489,000 couple of years ago and got a mortgage paying 8.5% interest only, which will change in a couple years and will have to start paying principal too. The house appraised @ #350,000 or so last year (probably worth less now). They both have good managerial jobs in retail & newspaper, but have not been frugal in saving. My other concern is that the industry that they are in is not stable. They have brought alot of luxury things, so they have other bills as well and don’t have much savings. Plus they have a baby along it’s way. My question is where do they get help. They have tried to refinace their mortgage but the mortgage company is not of much help. Should they walk away from this mortgage or is there some kind of government help that they can pursue?
- Grace

I’m really surprised that their mortgage company isn’t of much help. The government is strongly encouraging mortgage lenders to get bad mortgages off of their books and this certainly sounds like a bad mortgage. Have they tried to refinance in the last six to nine months? If not, they should try again.

If the company truly won’t work with you, they should take a serious look as to what happens with the mortgage when they have to begin paying principal. Since this is not a standard mortgage, does the interest rate adjust? How much principal are they going to have to pay?

In the next two years, they’re going to simply have to make some hard choices. Are they willing to give up their luxury goods? Are they willing to give up their home? One of those is going to have to give.

Q4: Thermostats, nighttime temperatures, and kids
My husband and I have had a programable thermostat for years, and always had the temp go down when we are at work or when we’re asleep. However, last year we had twins. They were born in November, and since they were tiny and fragile, and since we were home 24/7 and up all hours of the night, we just sort of let the thermostat stay at a constant 68 degrees. (which is pretty much as low I am willing to go, I truly dislike being cold.) We swaddled the babies as long as we could, then employed fleece sleep-sacks and layered onesies/footed jammies and hats at night. Now they are almost a year old, which is when those authorities who approve such things say you can put blankets in the crib, etc. The boys do sleep all night most nights, and we still use the PJ’s and sleep sacks. However, I am hesitant to use the thermostat to drop the temperature down during the night again because they move around so much at night, I don’t think they would keep a blanket on, and even with the sleep sacks and layered pajamas, they always have ice cold hands and feet when they are sleeping, even with the temp staying solid at 68 degrees. Also, we do still occasionally have middle-of-the-night wakings, when we are forced to be up and about and tend to babies. Usually we just throw extra blankets on the bed hen the real cold comes, but I am at a loss of what we can do about the babies. They are no longer frail little peanuts, they are solid, healthy, almost-one-year olds, but I don’t want them to be cold or uncomfortable at night. I would, however, like to save where I can with the heating bill. We live in a decently-insulated, modest 3-bedroom house near Chicago. Winters can be pretty brutal. We no longer have periods of time during the day when no one is here like we used to. We have someone come to our house to take care of them when we work, and when we don’t we’re often here all day anyway. What do you do to keep your kids warm at night, and let the temperature in the house drop down to save money? What about when someone is home all day? Or should we just suck it up to another essential expense of having kids until they are able to stay put in bed?
- Jennifer

As I’ve mentioned before, the benefit of dropping the temperature in your home comes when there’s no one active in your home – during the day if it’s empty and at night when everyone is sleeping.

Your note obviously eliminates the daytime drop as there are people at home and active. You’ve also noted a lot of different reasons why you don’t want to drop it at night.

If it’s personally important to you, then don’t drop the temperature at night. Simple as that. We drop the temperature some at night (down to 60F), even with three kids under five at home. There’s never been a problem with it.

Q5: Shady credit union practices
I am buying a house, thanks in no small part to you and your helpful blog, which I have been reading for years. For seven years I have banked at a wonderful, friendly credit union. They know all their clients by name. They have a lot of clients who have been through homelessness, addiction, etc and are only now (in their 40′s and 50′s, etc) opening their checking or savings account with them, and they are wonderful with these clients. They give tiny loans for $300-500 for clients to buy bikes to get to and fro from work, etc. In short, I have always thought this was the most progressive and wonderful credit union.

When I went to look at my credit report, however, I found that they had erroneously reported that I had paid my tiny revolving credit line 90 or more days late, multiple times. Of course this was an error — I’ve never been late on a payment, so I took all my records in and expected that they would clear the problem up right away. I was horrified when they basically acted like it was my fault, like I had made lots of late payments, and they casually told me they’d “look into it” and acted insulted when I asked for a manager or someone else to help me.

The mortgage broker had suggested I stand firm and insist on speaking with someone in charge, so I did — but they acted put off and angry. The person they finally brought out for me made me wait a long time and then did not call me for more than a week (she said she would call the next day.) When they found it was indeed an error, they insisted that I do all the work to call Experian and Equifax, formally dispute the charges and then they would “work on it.” One of those companies wants me to pay $10 to get their report before I can make an online dispute!

This makes me really sad. Personally, if someone came into my job and told me I would make a mistake, I would drop everything and research the issue until it was resolved. Especially if it was a good, long-term customer! I felt I had a personal relationship with the staff at this credit union, and now feel like they think I’m just some delinquent. Is this sort of behavior normal for a bank? Should I find a new credit union? Or am I just putting way too much personal feeling into a relationship that never existed?
- Linda

This doesn’t sound like an overall credit union problem. This sounds like an employee of a credit union who doesn’t want to put in any legwork.

If I were you, I would go to the credit union and escalate this. Bring in every evidence you can of your on-time payments. If the person at the counter won’t help you, escalate. If that person won’t help you, escalate.

If your story is accurate, the credit union is having some personnel issues that need to be addressed. Those aren’t good practices for any financial institution.

Q6: Direct stock purchasing
I’ve been reading your blog for the past few months and love it. I have a question about buying stock direct from an S&P-500 company. Right now, I have a few shares of company X in a Sharebuilder account. SB charges $9.95 (or something like that) per transaction, whereas if I buy stock directly through company X it only costs me $1 + $0.10 per share transaction. I plan on buying $20 or so per month in a buy-and-hold type of strategy because of the steady dividend payments on the stock. Do you think this is a good idea to avoid “high” brokerage fees? Secondly, the information on company X’s website indicates that it is possible to transfer shares from a brokerage to an account with them, but in order to do that – the shares must be assigned to me. How would I go about doing this so that I may transfer the shares to company X’s account?
- Josh

This is a good plan if you’re looking at it from the narrow perspective of investing just in the stock of one company.

However, you should keep in mind that a single company’s stock is a very poorly diversified investment. If that company fails, you lose most of – if not all of – your invested money. You should be counterbalancing this investment with investments in other things.

You also need to check and see what the policy is for selling the shares should you choose to do so. If they make it difficult in any way, that’s another red flag.

Q7: Frozen interest rates?
I just tried to use your blog post about calling the credit card company and asking for a rate reduction. I spoke with two people and was told that my credit union has frozen their ability to lower interest rates until February of 2011 because of the recent changes in government policy. Now, this definitely sounds like a [fishy story] to me, bit could there be any truth to it?
- KD

This might very well be the credit union’s policy. I’m not involved in the business analysis at that credit union, so I don’t know.

However, I will say that such a policy isn’t directly mandated by any government source that I’m aware of or that I could find while researching it.

Most likely, this is a temporary policy of the credit card company while they try to figure out their new game plan after the new credit card act that was just passed.

Q8: Which debt to pay first?
I just finished (re)filling my emergency fund to a level that gives me comfort – just around 10k.

I have about 1000 per month in free cash flow that I can use to pay down debt.

A) 17k private student loan @8% variable 18 / 20 years remaining. $150 monthly
Or
B) 7k auto loan @ 6% fixed with 24 payments left. $350 per month.

I save more money over the long run with option a, as well as reduce my risk of the variable rate increasing. But with b, I can change my cash flow situation rather quickly (e.g. extra 350 per month in a matter of 6 to 8 months). My brain tells me to go with a because of the long term savings, but my gut with b because the vehicle has a shorter usable life than the education, and the cash flow change is dramatic.

What are your thoughts?
- Chris

You’ve pretty much hit the nail on the head with your description of the two options.

I would look at other factors for the decision. How stable is your current employment? The more stable it is, the more I would lean towards option (a). How about your personal life? Is there marriage or a move or a child coming up? Again, the more stable things are, the more I would lean towards option (a).

Cash flow helps the most when you’re getting ready for changes because you can bolster your short term savings with it. If things are stable, then option (a) puts more cash in your pocket in the long run.

Q9: Huge student loan debts
I am almost 27 years old and I have a HUGE amount of debt. HUGE. After graduating from high school in 2002, I was accepted into a highly competitive 6year medical program that took students from high school and put them directly into medical school without having to get a degree before applying. The first 4 years of school went fine and I was successful academically. Everything changed for me in my 5th year when my father passed away suddenly from small cell lung cancer. I got way off track emotionally and let my school take a back seat to my bereavement. I took a sabbatical from school for 1 year to study for Step 1 of the boards and deal with my family issues. Needless to say, I didn’t study enough and I failed boards. Then I came back to school and retook the boards and failed them again. The school I was attending sent me to the Doctoral Candidate Review Board and I was dismissed from the program. At that point, I had had no job or income and was living off of student loans for school and for living costs. In total, I was taking out an average of $50,000/year split between private and public loans. After that career opportunity ended, I knew that I needed to get a job as quickly as possible and was hired in a supervisor role make $35,000/year. I have done Financial Peace, religiously read your blog along with an assortment of other personal finance blogs, and put myself on a very strict budget. I have worked with my loan companies and got an academic deferment for my public loans (I am now pursuing an MBA which my company is graciously paying for) and an economic hardship payment plan with my private loans. I have created a debt snowball and have eliminated any other kinds of debt ie credit card or small student loans (sub $5000). Recently, the most amazing and frightening thing happened to me and I was blessed with a beautiful baby girl. Prior to my daughter’s arrival in my life, I was barely making ends meet and planning for the future that I wanted. I was investing 10% of my income in my 401K, and putting $200 of every paycheck into my emergency fund, car repair fund, and xmas/birthday fund. Now, with Lila entering the daycare stage of her life, I am incurring costs that I never had the forethought to plan for. My big question is, what course of action would you recommend for me to get out from under this debt and keep my mistakes from negatively impacting the quality of my daughter’s life?

Pertinent numbers
Total Public Student loans: approx $225,000 at 5.375% interest – deferred till 2012
Total Private Student Loans: approx $85,000 at 4.20% interest – economic hardship, making $575 payments monthly
Rent/Utilities – $900
Avg costs for my daughter: $500
Bi-weekly take home pay is $950

From what I have read, you cannot declare bankruptcy on student loans but I feel like I have my back against a wall.
- Cary

That is backbreaking debt, no doubt about it. It is stories like these that make me very nervous to encourage people to incur a lot of student debt. If something goes wrong, you’re buried for a very long time without anything to help you out. Even if you make it, it slurps up a hefty chunk of your income for a very long time.

As for your problem, your best bet (that doesn’t involve trashing your credit, wage garnishments, and probable lawsuits) is to focus hard on that MBA and get yourself in the best position you possibly can by 2012. Every single dollar choice you make will impact this – you can’t afford any more debt and you need an emergency fund to protect yourself against that possibility. It’s time for used cars, beans, rice, and salad, my friend.

The problem with student loans is that they don’t go away. You can get sued at any time for an unpaid student loan. They can wage garnish you at any time for an unpaid loan. They just stick around until you pay them off. Your best approach over the long run is to face this challenge head on with everything you’ve got.

Q10: Company cuts 401(k) match
I am aggressively funding my emergency fund for 6 months of expenses following graduation but I have another question. You, and many other finance books, suggest only funding your 401(k) to the company match and using any excess to fund your Roth IRA. Due to the recession, my company has not matched at all for 2010 but may start again in 2011. Nevertheless, I continue to put 6% into my 401(k) and zero into my Roth IRA. This is in addition to funding my emergency fund. Should I re-direct the 6% to my Roth IRA until my company decides to match or keep things the way they are now?
- Lacey

I would start a Roth and contribute to that until the match returns. There are two big reasons for this. One, you’re almost always going to find better investment opportunities in a Roth due to the freedom of choice. Two, the money in the Roth is after-tax money – you won’t have to pay taxes on it when you take it out later.

As for whether the matching will return, I would bet on “no.” If a company realizes they can get away without matching, there will have to be a good reason for them to bring back retirement matching. From their bottom line, cutting matching looks like a “free” savings on wages – you’re not actually cutting anyone’s income, so they won’t mind.

The best thing you can do, though, is to just keep saving. The 6% you’re saving is far more important than where you’re saving it.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag. However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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