Stephanie Armour at USA Today demonstrates the value of cautious, frugal spending habits with her article today on the foreclosure situation in the United States. The most recent news is far from rosy:
- since the debut of the Obama plan for mortgage modification, lenders have moved forward with the foreclosure process on more than 1 million homes
- so far, of these 1 million homes, 20% have been foreclosed or repossessed by the lender
The anecdotes in the piece are even more chilling. Some lenders are outright losing the paperwork for modifying a contract. Clearly, mortgage holders need to take matters into their own hands. Here are some ideas for seizing control of the situation:
- Be proactive with contacting the lender. Ask for frequent updates on progress made on their end; quickly turn around any documents or information that they request of you. Lenders track contact histories with clients. By having frequently appeared on their call logs and email records, it sends an instant signal that you take the modification seriously.
- If you hold an adjustable rate mortgage, consider asking for a conversion to a fixed rate version. One of the easiest ways to fix finances is to set up a strict yet realistic budget that takes into account debt paydown obligations. But the effectiveness of this budget will depend on accurate predictions of monthly expenses. Adjustable rate mortgages can result in changing mortgage payments, so planning with one is tougher.
- Irrespective of having begun the modification process with a lender or simply anticipating mortgage payment problems on the horizon, getting all of the necessary documents into one central location for reference will reduce stress and keep things clear. Put your mortgage contract and monthly expenses/bills in one folder that’s easy to access. Even better, write down on one page your estimate of average monthly expenditures plus the basic terms of your mortgage (interest rate, fixed or variable, outstanding balance), and the monthly mortgage payment amount.
Finally, doing the quick analysis to know whether or not to foreclose or short sell your home is worth considering. This will help you to understand your real alternatives if the lender doesn’t ultimately modify your mortgage. Many families see foreclosing or short selling the home as a complete disaster. On the contrary: it is actually in the financial interest of some mortgage holders to do so. There are numerous factors involved in making this assessment, including the intangible value of the home to you or your family, but from a financial standpoint you can have an idea by considering the following:
- How much equity you have tied up in the home already. Many are not far into their mortgage repayment process.
- If you put a lot down on the home to start with, then do a self-assessment regarding your mortgage payment risk: what percentage of your total monthly income goes towards your mortgage payment? How secure is your monthly income (e.g., job security)? With ultra low income risk, putting more than 28% of your gross monthly income towards a mortgage payment is a good tolerance limit. As you self-assess income risk as higher and higher, a proportionally smaller percentage of your gross monthly income should go towards a mortgage payment.
- Some homeowners, desperate to hold on to a house at all costs, are cashing out their retirement accounts, even doing early withdrawal and taking an additional penalty. This is not in one’s financial interest except in the rare case that a mortgage is almost completely paid off. If one opts to take a “loan” from their own retirement account for any purpose other than buying a principle residence, bear in mind that it needs to be repaid in five years, with equal amounts in monthly payments beginning immediately. Under either scheme, do some rough math in your head to be sure: are the foregone investment growth and penalties worth it to save the existing equity in the home?
Share your thoughts and questions.
Raj Patel writes for DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs. DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.
Tags: foreclosure and short sale assessment, home loan modification, mortgage modification, mortgage modification options, mortgage modification strategy
