Ways to Deal with Rising Mortgage Payments, Housing Costs
Now isn’t the time to stretch the limits of housing affordability.
Between 2001-2006, mortgage interest rates were plummeting, home prices were zooming, lenders were approving borrowers for loans and owners had reasons to be financially afraid of the repercussions.
These days, however, many individuals who took a short-term low-rate loan or home equity line of credit a few years ago have seen their payments shoot up by hundreds of dollars a month. And another $1.5 trillion in mortgage debt is up for readjustment this year, according to the Mortgage Bankers Association.
For some, the new realities of the housing market are tough to swallow. You can’t ignore them - so here are some ways to deal with them:
Size up your situation
Is your housing stress the result of a short-term problem that could reverse itself soon, such as a layoff or an illness that triggered unwieldy health-care costs?
Or does the strain result from a more fundamental problem, such as overoptimism about the real estate market or miscalculation of what you could afford based on your income? The answer will help dictate your next move.
If the stress is temporary …
If it’s a temporary crunch, the solution may be as simple as rethinking your spending. For example, scour six months of bank and credit card statements for fat-trimming possibilities.
Some common items to cut: health-club memberships, vacations and gift-giving largesse. Got a tax refund this year? Try reducing your withholding so you’ll take home more money in your paycheck each month.
In fact, finding a few extra hundred dollars in your budget can go a long way even if your financial situation isn’t likely to change soon.
If you need a permanent fix …
When the problem isn’t temporary and you’ve already trimmed your budget thinner than a slice of prosciutto, you may need to consider more drastic moves.
If you have both a variable-rate home equity line of credit and a primary mortgage, you may save hundreds of dollars a month by mortgage refinancing into one new fixed-rate loan that ropes in both balances.
A $200,000 fixed-rate mortgage at 6 percent, plus a $100,000 HELOC at 9.25 percent, works out to total monthly costs of about $2,230.
Roll that entire $300,000 into a 30-year fixed-rate home loan at today’s rates and your payment will be $1,800 or so, a savings of about $450 a month.
This will quickly offset the cost of the refinance, typically a few thousand dollars. You should also consider refinancing if your credit has improved or you simply didn’t receive a good deal the first time around.
Ask for a lending hand
If refinancing isn’t a solution and you think you might not be able to make your monthly payment, call your home loan lender immediately and ask about a temporary reduced payment schedule, known as forbearance agreement.
“The last thing a lender wants is to foreclose; they run the risk of losing money,” says Erica Sandberg, a spokeswoman for the Consumer Credit Counseling Service of San Francisco.
Keep in mind that your home loan lender isn’t obliged to give you a break. But you have a good shot if you can prove financial need and have a plan to get back on track. And you’ll avoid a ding on your credit score.
Move on
When no amount of budgeting and strategizing will alleviate your housing stress, it’s time to consider moving on. The good news is that if you have owned your home for several years, you may still be able to sell at a profit.
SOURCE: Money Magazine