November 2, 2007
America's once red-hot housing market has cooled off considerably. Prices are down, unsold housing inventory is up and mortgage lenders have tightened credit standards.
What's worse, many borrowers who opted for adjustable rate mortgages (ARMs) are in for a big shock when millions of ARMs "adjust" to new, higher interest rates in the next few years. In a stronger market, these borrowers could simply refinance, using built-up home equity to qualify for lower, fixed-rate mortgages. Unfortunately, many now find themselves "upside down," owing more than their home's current value.
If you're in this situation, here are a few steps to consider before falling behind in your payments:
Carefully read your loan documents for terms that can make your interest rate rise or fall, such as:
Rein in spending. Your monthly payment could suddenly go up hundreds of dollars, so if you're already struggling, cut expenses now. If you don't already have a budget, create one. Practical Money Skills for Life, a free personal financial management site sponsored by Visa USA, has numerous budgeting tools that can help (www.practicalmoneyskills.com/budgeting).
Refinance to a fixed-rate mortgage, if possible. Well before your ARM readjusts, talk to your current lender and also shop around. With thousands of borrowers defaulting, lenders are more likely to negotiate if it means you'll stay a solvent, paying customer.
If you're in danger of missing payments or already have, contact your lender immediately and respond to all inquiries from them. It's better to work out a solution together than to let your options expire. Alternatives might include:
Talk to an attorney, financial advisor or housing counseling agency before taking any action and never make a payment to anyone other than your lender. Sadly, there are people who will take advantage of your bad circumstances.
Nobody wants you to lose your home, but you must take the initiative to find a solution before it's too late.
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