HELP ME CLARK!
From HLN's Money Expert Clark Howard

Kathy:

I have recently inherited enough money to pay off my mortgage ($130,000) and still have a lot left over ($100,000.) I also have $12,000 in savings for emergencies. I am single, 62 years old and give 10% to charity each year. Should I pay off my mortgage?

Clark:

Generally, the answer to that question depends on what your interest rate is. If the interest rate on your mortgage is 5.5% or higher, then it would be a no-brainer to pay that mortgage off. If your mortgage interest rate is below 4.5%, it's really a lifestyle choice if you want to pay off the mortgage just so you have the peace of mind that you no longer have that obligation. But I'll tell you, if you have a mortgage rate that is 4.875% or less, forget the piece of mind. Keep the money and pay the mortgage off as agreed for the entire length of the loan. So you've got a three-parter here. One, your interest rate is higher than 5.5%, pay it off. Your interest rate is between 5% and 5.5%, it's a tossup. If your interest rate is below 5%, no way you should rush to pay it off.

HLN Money Expert Clark Howard.

Clark Behind The Headlines
From HLN's Money Expert Clark Howard

“Short sale” is a term that no one had heard of 18 months ago. And, even today, it’s very misunderstood.

A short sale is where I own a home, and  I owe more on it than what it’s worth.  I need to get out and I don’t want to be foreclosed on.  So I ask my lender if I can market the house as a short sale, meaning that the price of the home is marked to market. The bank then takes a hit on the loss between what the mortgage is and what the market is today.

Now, are banks running charities?  No way!  The reason why a bank would do a short sale is that it’s much cheaper for them than a foreclosure.  The costs of foreclosures are much greater for the bank because, ultimately, they get less than what they’d get on a short sale, and they end up with enormous costs going through the foreclosure process and the aftermath.  So it sounds like it would be a logical thing to do in a marketplace where people who bought at peak with 100% financing are now so far upside down.

What has changed is the federal government is now subsidizing the banks to allow short sales to go through. The feds are eating some of the losses as an incentive to try to get the banks to do something that’s better for them anyway from a business stand point, which is to cut a deal with people short of foreclosure.  For the seller, it’s a deal because you get out with the shirt still on your back and you didn’t suffer foreclosure.  Your credit score does suffer in a short sale but not as much as it would with a foreclosure.  Quite often, foreclosures lead to bankruptcies, which devastate your credit standing.

So the short sale thing is starting to flip.  It doesn’t mean that every lender has it together.  The biggest lenders have set up the equivalent of war rooms with specialists whose job it is to process these.  Some of the big lenders now take short sale request electronically rather than give that phrase we kept hearing: “Oh, the paperwork is lost”.  So as someone who has long derided short sales, I want to tell you they’re back in the game if you’re looking for a distressed piece of real estate.

HELP ME CLARK!
Mortgage Trouble

From HLN’s Money Expert Clark Howard

SUE:

My son has an excellent credit rating. His house has been for sale for a year now and he is struggling to make payments.

If he gets the mortgage company to agree to a deed in lieu of foreclosure, will this impact his credit score?

CLARK:

Yes, it will hurt his credit. It won't hurt as much as a foreclosure, but the way a deed in lieu of foreclosure tends to be reported by lenders will cause him some harm.

But there's something that will cause more harm than that. And that is if the lender tries to get you  to sign a promissory note. Make sure that your son looks thoroughly through the papers that are given to him and makes sure he's not being hit with a promissory note, which is his promise to pay the lender some amount of money against the losses they're taking by doing a deed in lieu.