The loose credit of the early part of this century is haunting us as millions of people with bad credit were offered mortgages and at this point millions of them have faced or will be facing foreclosure.
This seemed like a great way to own a house, considering they were offered with no down payments, and seemingly attractive rates, even if they were going to be changed periodically.
But the real estate bubble burst, and home values are coming down and interest rates are rising.
Some of these mortgages could have rates approaching 10%, which translates to over $2,000 on even a modest home loan of $200,000. Even a small adjustment in the ARM (Adjustable Rate Mortgage) could mean a $300 to $400 increase in the mortgage payment. Even if they would like to refinance, they may not have the option since the value in their home has decreased and credit conditions have become much more stringent. (Now the balance of the mortgage is more than the value of the house.)
How can these borrowers cope? The government is at this moment looking at a number of rescue moves, but a homeowner can do something even now to avoid problems by taking some aggressive steps of his own.
Ignoring the issue is one of the worst things to do. As soon as a homeowner realizes he may have a problem with this month’s payment, he should contact his bank. In many cases, they will work out a payment plan, especially if there has been some issue such as a loss of a job or illness.
Get in touch with a counselor. The Department of Housing and Urban Development can recommend a housing counselor in your area who can help you find ways to dig yourself out of the problem.
Reduce overall expenses, especially your credit card debt. You may not be able to reduce energy and food expenses, but now is not the time for the cell phone plan with a phone for each member of the family, or the premium high density television package from your cable provider. The savings can be devoted to your high interest credit card debt or to catch up on the mortgage.
Find out if you may be eligible for government assistance. There is a program whereby some low income families can change their adjustable rate mortgages to fixed year, 30 year loans at reasonable rates.
There are some more drastic solutions, but if nothing else works, you may not have a choice.
Sell your home. In today’s market, that may mean a loss altogether, but banks have been known to consider using the proceeds of the sale as settlement of the loan. It is often a better solution for the lender.
What about bankruptcy? This is a last ditch resolution since you will be tied in terms of your long range financial plans. Your credit rating will, of course, be even further damaged, but your loans may be consolidated and some even eliminated, allowing you to catch up on your debt.
Solutions do exist, but not if the homeowner waits for the answers to come to him; aggressively addressing the issue may be the only way to avoid losing your home in foreclosure.
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