Teachers who purchased using the CalSTRS 80/17 Teacher Home Loan can now use the new CalHERO Teacher Loan program to refinance and consolidate their soon to be exploding CalSTRS mortgage and avoid a train wreck waiting to happen.
The CalSTRS 80/17 home buying program was discontinued in September of 2011, as mentioned in this announcement, because they are unable to offer more attractive financing for there members(such as CalPATH).
It’s Time to Refinance Your CalSTRS Mortgage
The CalSTRS 80/17 home buying program was inadvertently set up to fail from the beginning because CalSTRS only qualified buyers based 80% of the purchase price, then gave CalSTRS members a deferred interest (no payments) 2nd mortgage for 17% of the sales price and did not consider the future amortized payment when determining their ability to repay in the future.
CalSTRS was essentially qualifying borrowers for loans they could not afford with the hopes borrowers could refinance in the future.
Is the CalSTRS Deferred Interest 2nd Mtg. Similar to a Toxic ARM Mortgage?
The CalSTRS deferred interest 2nd mortgage grows over time, just like a toxic negatively amortizing adjustable rate mortgage – ouch. The rate at which it grows is the same interest rate of the first mortgage. Every day that 2nd mortgage is deferred it continues to get larger.
Another reason the CalSTRS 2nd mortgage payment will be much higher is because the 2nd mortgage payment term is amortized over 25 years…..not 30 years.
For Example: Borrowers who purchased in February 2010 may see increases of $250 to $600+ in their total mortgage payment if they don’t consolidate their 2nd mortgage into the new CalHERO Teacher Loan program today.
A more detailed analysis of the risk and affordability problems associated with the CalSTRS (and CalPERS) home loan programs can be read here.
Your CalSTRS 2nd Mortgage is Exploding!
If your purchase price was $325,000, your 17% 2nd mortgage balance was originally $55,250. If the interest rate was 5.75% at the time, your 2nd mortgage will defer about $3,177 of simple interest each year. Five years later, your current balance may be around $71,135!!
That $71,135 will now be amortized over 25 years and increase your payment by $445/month…..that’s a train wreck waiting to happen if you don’t refinance.
Previous Roadblocks to Refinancing a CalSTRS Loan
- Equity – CalSTRS borrowers have not had enough equity to consolidate their 80% first mortgage and their 17% deferred interest (now larger) mortgage into one low rate loan up until now.
- The servicer of the CalSTRS loan has been difficult or often times unwilling to subordinate the 2nd mortgage and allow borrowers to refinance the first mortgage. If they did agree, they would offer CalSTRS members an interest rate that was much higher than what it should be, thus eliminating the benefit of refinancing.
Many CalSTRS borrowers missed out on being able to refinance when rates were at their lowest because of these two major roadblocks.
Is CalHERO the Best Option to Refinance a CalSTRS Loan?
I think it’s fairly obvious that emptying your savings or retirement account to pay off or pay down the 2nd mortgage is not a wise financial move, but you may want to consult with your CPA or Financial Adviser. Besides, who has that kind of cash sitting in their bank account?
Using an FHA loan to refinance a CalSTRS 80/17 combo loan probably won’t save you as much money due to the FHA mortgage insurance premiums.
The Solution: The new CalHERO teacher loan appears to be the best option to refinance a CalSTRS home loan.
The Numbers Don’t Lie
To find out if you are eligible and/or how much you can save by refinancing your CalSTRS 1st & 2nd mortgage into one loan and avoid a train wreck, consider the new CalHERO teacher loan and contact me or call (951) 215-6119.