How to Afford Payments on Your Adjustable Rate Mortgage
So you’ve managed to keep your house, your job, and even your credit report clean during the economic meltdown. But, the storm’s not over just yet. The second wave of foreclosures and economic instability is gearing up to wreak havoc. And what’s worse, you’ve just realized that you are in the middle. Your adjustable rate mortgage is getting ready to adjust and you might not be able to afford the payment.
So what can you do?
There are several things you can do that can help you survive your adjustable rate mortgage. You can achieve this without having to resort to a second or third job or without having to start a home business, although if it's practical, earning extra income sure can go a long way as well. The options available to you will depend on your current situation, but in most cases you can avoid foreclosure and ultimately get a mortgage with better terms.
Step One: Batten down the hatches and save money!
1. Evaluate new car payments vs old car maintenance costs.
I often wonder why people choose to get new cars as often as they do. If you already own a gas guzzling SUV, it may still be a better move to keep it under certain circumstances: while driving such a car may not seem like the politically correct thing to do right now, paying a little more at the pump at each fill up is still way less than a new car payment. Of course, you may have to weather a few condescending looks from those smart car drivers, but at least you know that you won’t have to call a taxi the next time the ball team needs a ride to the field. Here's more on how to cut car ownership costs.
2. Cut down on credit card use.
This one is a no-brainer. Stop using credit cards unless you can pay them off completely every month. But for many, the temptation to let one's balance roll over into next month is simply too great. You need to keep a credit card around for emergency purposes, but it should take an act of Congress to get to it.
3. Pay your bills on time and stay out of the red.
Do you have any idea how much money you pay out in late fees? Probably not. I know I didn’t until I started adding them up on my bank statement. On average, we pay $350 or more in combined late fees, bank fees and other “stupid tax” that could instead be chucked away into a high interest savings account. So create a workable budget and stick to it.
Step Two: Get better terms on your loans and mortgage.
1. Consolidate your debts.
People often forget that they may have some leeway with the loans they carry. If you've got good credit and have been managing your debt load well, you can possibly negotiate better terms for your existing loans. Using balance transfer credit cards to get lower card interest rates has worked for me. You can also also consider joining a peer to peer lending network to secure better interest rates. You may also want to explore the possibility of debt consolidation as an option.
Now it's time to take a look at your adjustable rate mortgage. The best case scenario is to refinance it into a fixed rate mortgage as soon as possible. With an FRM, you'll know what your payment is going to be each month and if you choose to leave any equity you’ve built up in your home, you might actually be able to reduce your payback period from 30 years to 15 or less, saving you a ton in interest. Depending on the amount of equity you have in your house, you may also be able to draw out some cash to place into a savings account or pay off more expensive debt as well (e.g. credit cards and auto loans), although this is something you'd want to weigh carefully. The drawbacks are that not everyone will qualify for refinancing. If you’ve had some hits on your credit, if your house value has significantly decreased or if you lack sufficient funds to cover a down payment and closing costs, then odds are that you won’t qualify.
3. Modify your existing loan.
While not quite as desirable as refinancing your loan, you may qualify for a loan modification. In a loan modification scenario, your lender will adjust the terms of your mortgage — usually by reducing fees and interest — so that the payment remains affordable for you. In exchange for this consideration, the lender will receive a cash incentive from the government and avoid a costly foreclosure. The drawbacks for this process are that not everyone will qualify for a loan modification. In most cases, the borrower has to already be severely delinquent and the reduced interest/fees/principal may be due as a balloon payment at the end of the mortgage.
4. Sell your home.
As a last resort, you may have to consider unloading your house. This is probably the least desirable outcome, but selling your home is much better for your financial standing and credit, than going through a foreclosure. This way, you keep your credit intact and will increase your chances of being able to obtain financing in the future. In certain situations, it may be advisable to sell the house for what you owe (if the balance of your mortgage is less than the value of the home) in order to sell it quickly. The drawback is that this process won’t help if you owe more than your home is worth.
If you find that you are at the verge of getting into financial trouble with your mortgage or you're already in a tight situation and don’t know what to do, call your lender. Do it now because every minute you wait may mean fewer options you have for getting back on course. You may be surprised that there are still many lenders who are willing to work with you and help you get on a path that will keep you in your home and out of foreclosure.
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