I originally purchased the home for $711K and put down $140K on the house leaving me with a $570K principal. I had an interest-only loan for 5 years which ended 4/1/09. In 9/08 my income was reduced $500/mo and my mortgage went up $1100/mo 4/1/09. I fell behind on my mortgage and am now in foreclosure (I haven't paid in 14 months). After 21 months of numerous letters to Countrywide/BofA NACA got me an offer with two options:

1) 2% interest lifetime. They added $60,000 to the loan for the missed payments and unpaid taxes so now I owe $627K. my payment would be $2600 + taxes which I cannot afford, over 50% of my net pay.
2) 3.5% for 5 years interest-only. makes my payment $1800 + taxes. This is much more affordable at 32% of my income.

I also have a $37K equity loan with a different bank in which they have written off the loan - basically they're sitting back waiting for either the house to get equity so they can get their money or for it to sale.

Of course the 3rd option I see is to short sale the house and just be done with this house. The problem is that I will be forced to rent. With this said I'm thinking option 2 is the best because it will be like paying rent except I can write it off on my taxes. Then in 2 years (once my credit is cleaner) I can apply for a new house loan and walk away from this one.

What do you think?