Reasonable Real Estate Financing!?!
If you’ve bought a new home in the last few years while interest rates were favorably low, it’s time to look at your current mortgage and determine if the financing you have is reasonable or perhaps a little “too creative” for the current market. In the last few years, many buyers were lured into making home purchases with hybrid mortgages that offered creative features such as no income verification, no asset verification, minimal payment options, 100% loans, interest-only payments and so on.
In a market that had been seeing a steady decline in mortgage rates over a period of several years, these mortgage programs seemed like safe bets. With today’s rates on the increase and the economy experiencing numerous ups and downs due to rising gasoline costs and back-to-back hurricanes slamming into the Gulf coast, previous financing choices may need re-evaluation.
If you bought more house than you could reasonably afford and you have been making interest-only payments, you may be facing negative amortization on your principal balance. Not a significant risk when property values are soaring upward, but a potential financial pitfall if values level or decline.
If you have no money put aside “for a rainy day” and find yourself without income due to an accident, health or job loss, your mortgage may no longer be affordable.
If your adjustable rate mortgage is based on an index that is volatile and/or adjusts frequently, such as once a month, you may soon find your steadily increasing payments are no longer comfortable.
What do you do?
Obviously, you don’t want to take any drastic measures, such as selling your home, if you don’t have to, but you should look at your financial situation and evaluate what choices you can make to manage your mortgage payments and maintain your fiscal health.
If your property has appreciated at all since you purchased it and you can manage the payments, you should refinance into a fixed rate mortgage. Doing so now will ensure that you have a competitive rate, probably below 6% with good credit, and you won’t have to worry whether interest rates go up or down in the future.
If you have a low rate ARM that is fixed for several years but have been making interest-only payments, calculate what a full principal and interest payment would be and begin paying that amount toward your mortgage each month. This will ensure that you build equity in your property even if values flatten.
If refinancing or paying toward your principal balance is not possible for you with your current finances, you may want to consider selling your property now while values are up. Then you can take the profit and make a down payment on home more reasonable for your financial picture. While this would not be the preferred choice for most of us, it may be the prudent one if you’re on shaky ground financially anyway. It would also guarantee you won’t risk facing foreclosure if your finances worsen or increasing interest rates drive your payments too high to manage. It is far easier to sell a home now and buy up again in the future than to find yourself in foreclosure which can prevent a purchase of any kind for several years.
Even if you are quite comfortable with your finances and your current mortgage loan, regular evaluation of both can help you continue to maintain and meet your financial goals both now and in the future.