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Originally published May 3, 2009 at 12:00 AM | Page modified May 4, 2009 at 3:37 AM

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Money Makeover

Seattle couple stretched to buy house just before downturn

A Seattle couple with two young children stretched financially to buy a home just before the market tanked. Now they need a new plan.

Special to The Seattle Times

About this series

This is the latest in a series of monthly "financial makeovers" by The Seattle Times for readers who want to get real about their money.

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After a stressful nine-month search that began in 2007, John Bowers and Monica Jackson bought a $448,000 home in Seattle that was far from their ideal.

On the plus side, it was in a neighborhood they loved, close to friends and good public schools.

If they didn't jump on it, they feared being priced out for good.

But there were considerable drawbacks. A big one: They couldn't afford the monthly payments in the short term without tapping into savings.

And, with two bedrooms and one bathroom, it was a tight squeeze for the married couple and their two young children, Noah and Rainey.

They thought both squeezes would be temporary. Bowers, 39, would likely receive a promotion or raise within a few years, and Jackson, 38, was planning to work more hours when Noah started kindergarten in the fall of 2009, making the mortgage much more manageable and remodeling a possibility.

But then housing prices started dropping and the economy started tanking.

"We took a calculated risk with this house and it just didn't work," said Bowers, the director of Workforce Education at Green River Community College in Auburn.

"We have the worst timing," added Jackson, a substitute librarian with the Seattle Public Library system. "We bought in April 2008, and within two months, everything crashed. We saw the signs in other parts of the country, but everyone said Seattle was different."

Their savings includes the profit from a home they sold in Seattle in 2005 before a two-year stint in St. Louis. Jackson says their frequent moves — six cities in 14 years, including Juneau and Anchorage in Alaska and a Peace Corps assignment in Morocco — have hurt them financially.

And now, with hours drying up at the library, where Jackson works weekends so she can stay home with the kids during the week, and state budget cuts for education looming, the timeline for using their savings to meet their monthly expenses seems to be stretching further out.

A nervous feeling

"We have about $30,000 left (in savings)," Bowers says. "The plan was to use $1,000 per month, but it usually goes to $1,500. That's what makes us nervous."

On a good month, their combined take-home pay hovers around $4,600, and about $3,000 of that goes to their mortgage payment, which has a fixed-interest rate of 6 percent and includes taxes, insurance and private mortgage insurance (PMI).

When Jackson isn't called in to sub at the library as often, they may bring home $4,000 in a month.

Jackson, a Native American, also gets a dividend check twice a year as a member of an Arizona tribe. The amount varies depending on the performance of the tribe's leased farmland and casino, but the extra $3,500 or so in each check means another month or two they won't have to use savings to cover expenses.

Fortunately, other than the mortgage and a $50-per-month student-loan payment from Jackson's master's degree program, the two are debt-free, have good credit and live frugally.

"There's nothing extra," Bowers says. "We don't have cable and we don't go out. We don't get coffees and lattes. All the things that they tell you to do, we've already done."

Uncertain future

Which has them wondering what to do next. Try to sell the house at a loss in a down market? Spend some more savings to fix it up first? Or stay put as long as they can?

In hopes of avoiding another misstep, the couple met with Maureen Jones of Financial Network Investment in Seattle. Jones, a member of the Financial Planning Association — Puget Sound Chapter, took a look at the couple's financial profile and made some recommendations.

Jones agreed that Bowers' and Jackson's mortgage and general housing concerns were their most critical issues. She recommended against Jackson and Bowers selling now.

"It would be expensive and would also make it much more difficult to buy another house, whether now or later," Jones wrote in her plan for the couple. "I especially dislike the idea of you using any of your savings to fix up the house."

Jones told the couple that they need the cash as emergency savings more than they need a nicer house. She acknowledged that while the value of their house — Jackson and Bowers think they are on the verge of being "underwater" on their mortgage, owing more than the home is worth — and cash-flow situation might not look much better one year from now, she is confident that five years from now, things will be much different.

Jones applauded the couple for trimming expenses where possible and for not spending beyond their means, with the exception of the house.

A new plan

To help get through their current crisis, she suggested that Jackson find ways to increase her income. Jackson is applying for a part-time job with the King County Library system and has been checking elementary schools for openings.

"School libraries aren't hiring now," Jackson said. "It's just kind of waiting for things to open up again. I have considered things outside of my profession, but at this point I'm not ready to go that route."

Bowers has been accepted into a University of Washington program where he will earn his doctorate in education while still working. The degree could lead to a promotion and an increase in salary.

And as a state employee, most of his tuition will be waived, though Bowers has heard rumblings that tuition waivers may not be available in the fall, depending on state budget cuts.

If that's the case, the financial planner urged Bowers to avoid taking on student loans if at all possible. Apart from boosting income, Jones said the best solution for the two would be to explore a home-loan modification.

Bowers said they had previously talked to their mortgage broker, who seemed lukewarm on the idea of refinancing, since it's likely the couple no longer has any equity in the home.

But they hadn't yet looked into modifying the mortgage.

"When your loan term is modified, any terms of the loan can be changed," Jones suggested, including the interest rate, length of time and monthly payment.

Jones also said they could work with a nonprofit agency first and to be wary of any firm asking for upfront payment.

As a first point of contact, she pointed the couple to the Washington Home Ownership Center or to a certified mortgage-planning specialist.

Smaller steps the couple could take to free up more money to cover the mortgage include taking another look at their life-insurance policies to lower the premiums and postponing the $50 monthly contribution they are making to their son's Coverdell Education Savings Account (previously known as Education IRAs).

"I believe your retirement savings should be a higher priority than saving for college," Jones wrote to the couple in her plan for them.

She also commended them for leaving their retirement savings intact, and for resisting the temptation to panic and sell their holdings and convert to cash.

"It would be a mountainous climb to try and rebuild those accounts if you cashed them in, so I'm very happy you haven't," Jones wrote.

For their part, Bowers and Jackson are focusing on their mortgage.

"We're hoping that the loan modification is going to be the key to all of our problems," Jackson said. "If we can get the payments more affordable, we'll be in a much better position."

Copyright © 2009 The Seattle Times Company

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