How to cope with rising mortgage payments
If you got an adjustable rate mortgage over the last three to five years, the low introductory rate that made your monthly payments seem so affordable is probably over -- or nearly over.
Now your payments are going up, maybe by hundreds of dollars a month, and you're in shock.
The reason is simple: When you took out your mortgage, interest rates were at or near record lows. Now they're not.
About one in four mortgages will have their interest rates reset in 2006 or 2007, so you're certainly not alone. It's a dilemma millions of homeowners must cope with.
What should you do? That's the question we posed to eight of the best experts on personal finance we know.
Together, we came up with steps you can take, based on how much your payment has gone up, with the ultimate goal of keeping you out of foreclosure. Some of these steps may seem drastic or tough to accept, but at least you'll have a starting point for taking control of your situation.
Whatever the amount, do whatever you must to keep up with your payments. If you can't pay all your bills, pay the mortgage first. If you don't pay your Visa bill they take away your card. If you don't make your mortgage payment, you'll lose your house.
IF YOUR PAYMENT HAS GONE UP $100 A MONTH:
Consider yourself lucky.
That's less than $3.25 a day -- the cost of a grande latte at Starbucks and less than renting a single movie at Blockbuster. You should be able to meet your higher mortgage payment without a lot of sacrifice.
Start by examining your daily expenses and see what you can cut out and never miss.
For instance, are you grabbing coffee and a bagel on the way to work, snacking out of the vending machine and eating out for lunch every day?
Change just one part of your daily routine eat breakfast at home, skip the vending machine (or buy a 12-pack of sodas and a box of microwave popcorn at the grocery store and take them to work) and take a lunch instead of eating out and you'll have the extra cash you need.
Ease yourself into those kinds of changes by starting with just one or two days a week.
Also, look at your monthly expenses.
Are you paying for premium movie channels that you never watch? Did you sign up for online services you don't use, such as commercial-free radio or unlimited electronic greeting cards? Cancel them and you'll be amazed to see how much extra cash you have lying around.
You could also go online and sell personal items you don't need or don't mind parting with. If you've put all your favorite music on an iPod do you still need the CD's? You can sell them on eBay or Amazon.com, along with books you've already read, movies you've already watched, clothes you (or your kids) no longer wear or collectibles that don't mean anything to you.
IF YOUR PAYMENT HAS GONE UP $200 A MONTH:
If you work at a job that offers an opportunity for overtime, this could be the answer to your problem. The equivalent of one extra shift a week would probably be enough to give you the extra money you need.
If that's not an option, consider taking a part-time job at night or on the weekends. Some folks have used this strategy to pursue an interest or learn a new skill. Are you a morning person? Call your local newspaper to see if they need people to deliver the paper.
Do you have a skill you could turn into a business? If you're a whiz at a particular subject, you could do some tutoring at $30 or more an hour. Do friends call you when their computers have crashed? Hire yourself out as mobile tech support the pros get $100 an hour or more. Maybe you make awesome cakes or you throw legendary parties. Get into catering or event planning. Get the word out by putting a classified ad in your community newspaper (they're really cheap) or on an online bulletin board.
The part to remember, though, is that you need to set aside a portion of what you earn to pay your taxes. The last thing you want is to get hit with a super-sized bill and a penalty -- come April 15.
Another possible source of cash flow is your retirement fund. If you've been paying into a 401(k) at work, you could cut back on that contribution. If your employer provides matching funds, do the minimum you need to get that free money. But if the choice is cut back on retirement savings or lose your house, cut back.
IF YOUR PAYMENT HAS GONE UP $300 A MONTH:
That's enough to consider refinancing your house.
If you're only planning to stay a few more years, consider two short-term fixes:
- An interest-only loan that doesn't require you to pay any of the principal over the first few years.
- Another adjustable rate mortgage. The introductory rate will be higher than for your old loan an average of about 6.3% for a five-year introductory period, up from about 5.2% this time last year. But if your adjustable rate has already jumped to over 7%, or is poised to rise above 7% when it resets again over the next couple of years, this could still work for you.
If you are planning to stay in your house for the long haul, look into a fixed-rate mortgage. A 30-year loan is averaging about 6.7%, about a percentage point more than this time last year. But it could still be less than your adjustable rate mortgage is charging and you won't have to worry about another reset, and even higher monthly payments, each year.
Taking out a new loan costs money, so make sure you know what the lender fees, appraisal fees and other closing costs will be, and whether you have to pay cash or can add those charges to the amount you're borrowing.
To find the lowest rates and determine how different rates would change your monthly payments, click back to our home page and use our rate finder and mortgage calculator.
Another option is to free up several hundred dollars a month by eliminating a major expense such as a boat, motorcycle, off-road vehicle, time-share condo, or season tickets to your favorite sports team.
You might be surprised at how much you can save by selling your car or truck and get something more affordable. If you're driving a big $30,000 pickup or sport-utility vehicle that gets less than 20 miles per gallon you can not only reduce your monthly payments, but spend less on gas and insurance, too.
Instead of cutting costs, how about boosting your income by taking in a renter or getting a roommate? A walk-out basement with a separate entrance or a studio space above the garage is perfect for having a renter, but you can also make it work with a split floor plan with bedrooms on opposite sides of the house. If you live near a college, contact the housing office to post that you have a room available, or run an ad in the local paper or an online bulletin board for a roommate.
If you or your significant other is staying at home to raise kids, you could also bring in some cash by doing in-home day care. Many working parents much prefer having their child in a home than in a daycare center.
IF YOUR PAYMENT HAS GONE UP $400 OR MORE A MONTH:
You could barely afford the payments when you took out the loan; now you're really in a jam. What you really need to do is sell your house, get out from under this debt and buy something with a fixed-rate mortgage that you can afford on your current income. If your interest rate just reset, you have a year to sell your house before the next reset hits.
But what if you can't sell the house because you took out all the equity, the market has softened and now you owe more than the house is worth? Or selling isn't an option because there is nothing more affordable in your market? Or you've tried to sell the house but you haven't had any offers? Or you can't refinance because you've got dings in your credit and the terms you're being offered are astronomical?
If you're thinking about filing for bankruptcy and walking away from the debt, think again. With the rewrite in the bankruptcy code last year, this debt will follow you, so do whatever you can to keep from going into foreclosure because that's just about the worst thing that can happen to your credit rating.
Here are some last-ditch things you might try to keep up with the payments while you figure things out:
- Borrow money from your 401 (k). If you decide to do this, understand that generally, you have to pay back what you borrowed within five years. If you get fired, quit or laid off, you have to pay it all back within 60 days of your date of termination. If you don't, you'll get hit with a 10 percent early withdrawal tax penalty on the balance, plus you have to pay taxes on the income that year. The plus side is that if you do pay it back as planned, you'll be paying yourself.
- Cash out life insurance. If you have a cash-value life insurance policy (it may also be called a whole life or indemnification policy), you can access the money in the policy, either by withdrawing the cash value or borrowing against it or both. The goal should be to pay it back, but if you don't, the amount is simply deducted from what is paid to your beneficiary upon your death.
- Borrow money from a family member. When they're functioning the way they're supposed to, families help each other out. If you're in a real bind and you know it wouldn't put them in financial jeopardy to help, it's worth asking a family member for a loan. If you value the relationship at all, put the deal in writing with a schedule for repaying the loan at a nominal interest rate and then do it.
- Take on an "investor." As an alternative to borrowing from a family member, see if they might want to "invest" in your house, paying the portion of the mortgage payment you can't cover. If you're going this route, definitely talk to an accountant and an attorney about drawing up the proper documents.
There are a number of ways to approach it; the simplest is to sell them a portion as a vacation home, kind of like a time share. Then they can take a portion of the mortgage interest as a tax deduction and take a share of the profits if and when the house is sold. Or, they can purchase a portion of the house strictly as an investment, capitalize their share of the interest and property taxes, and track all the expenses until the house is sold. Those expenses will go against their profits from the sale and reduce their capital gains.
WHEN ALL ELSE FAILS:
If you've cut expenses to the bone, taken on a second job, begged everyone you know for a loan and you still can't make this month's house payment, call your lender now.
Yes, it's embarrassing, but it will be a lot more embarrassing when they foreclose on your house, sell it on the courthouse steps to the highest bidder, and the new owner serves you with an eviction notice. There are people who do this for a living and they won't lose a bit of sleep over it.
So call your lender. The good news is that he has a lot of incentive to help you out and if he's been in business for more than an hour, he knows that life happens and people get into trouble. Plus, he does not want to own real estate and pay property taxes, utilities and the cost of processing a foreclosure. He wants your money, not your house.
He won't make the debt go away, but he may be able to give you a payment break and tack those payments on to the tail end of the loan for a fee, of course. It's called a work-out and it's pretty much a one-time offer, so don't use it unless you don't see any other options. And be completely honest with the lender about your situation. Keep the lines of communication open. If you stop talking, or start tinkering with the truth, your options will disappear very quickly.
We developed this advice with the help of:
- Adam Brown, vice president of New York-based Topdot Mortgage
- Eva Rosenberg, an accountant, income tax educator and enrolled agent, which means she's licensed by the U.S. Treasury Department to represent taxpayers before the IRS
- Mary McGrath, a Certified Financial Planner with Cozad Asset Management in Champaign, Ill.
- Bob Walters, chief economist with Quicken Loans
- Eric Rosen, Broker Services Manager for Charter Funding in Rockville, Md.
- Barry Armstrong, a financial planner with Woodbury Financial Services, Inc., and host of "Money Matters," a daily, two-hour, syndicated radio show
- Justin Aldi, CEO of First Security Lending in Burbank, Calif.
- Robert Beal, president of Front Row Mortgage Co. in Atlanta