Four Steps to Solving Your ARM or Refi Nightmare (And Avoidance Isn't One Of Them)
George Boelcke FCI
October 17, 2007
Between now and the end of 2008, $571 billion in mortgage loans will be resetting their interest rates with an average payment increase of $1,018. For prime borrowers, it will be about $450, but the big hit will be the teaser rate borrowers whose payments are likely to double, increasing an average of $1,825, according to Fortune Magazine.
Averages aren’t very meaningful because ever situation, bad ARM or financial picture is very different. But for over 223,000 families whose loan went into foreclosure in September, it’s often too late. Yet these aren’t just statistics on television - they’re real families and real lives.
If your loan is resetting in the next year or so, the onus is on you to get ready, organized, proactive and informed. Nobody will do it for you because nobody else has as much invested in solving this problem as you do. Knowledge is always better than hope alone. Hope alone is the worst financial strategy, all the wishing isn’t going to change things around and an Ostrich mentality won’t solve anything.
Here are four critical steps that can play a big part in possibly loosing your home or work your way through the interest rate reset you’re facing:
First and foremost, communicate with your lender. They are not in the foreclosure business and have no interest in owning your home. Yet almost half of all people don’t ever talk to their lender before foreclosure action starts. Your lender may well have ideas, programs or internal ways they don’t advertise publicly to help in some way and to work with you and your circumstances. If only you’d call.
Many states also have a local help and information hotline and the Homeownership Preservation Foundation has a national hotline at 888 995 HOPE. Remember that asking for help is NOT a sign of weakness – it’s exactly the opposite! It’s a sign that you’re prepared to do what it takes to come out of this as a winner.
Know the details about your loan. You have to have know or organize these five critical things:
Where are you at? Know your reset date, current payment and rate details
What’s your credit score? It’ll be the major factor in what rate you’ll be paying. After all, rate equals risk
What will the payment go to? Get the today rate and what new payment would be (even if your reset doesn’t happen for a while, you need to have a rough idea of what it’ll go to)
What’s your home value? There are a number of web sites to give you an idea, call a realtor or walk down the street for comparable homes currently for sale
Get your paperwork in order. This includes copies of your current insurance policy, last pay stub, last years’ tax return, proof of additional income such as child support, lease from a tenant
Get your credit score up: The: It’s Your Money book has an entire chapter on factors that impact, raise or drop your score. It is critical that your score gets as high as possible in the time you have left before your reset. According to Fair Isaac right now, a score of 760 or higher gets you the best rates. A score between 700 and 759 will cost you an extra 0.23% and an extra 0.5% if it’s between 660 and 699.
Some of the critical factors that impact your score include getting your credit card balances to less than 50% of your limits (ideally it’s 30% or less) and generally reducing your monthly payments and debt. Make absolutely sure all of your payments are current, no matter what, and don’t apply for any new credit until your loan is refinanced. Remember that a high credit score is way more about avoiding stupid mistakes than doing anything positive.
Get on a written budget and reduce your monthly expenditures. No matter what, your payment is going up and that money has to come from somewhere. Not only will a budget let you see exactly where all of your income is going, it’ll show you the places that are sucking out your money each month. Then you can decide if that expense or payment is more valuable than keeping your home. Because it’s always a choice of priorities – always. Here are a few money-leakers that will quickly add up to finding the extra money to be able to afford your new mortgage loan payment:
The car: This is likely your second biggest expense each month, never mind that most people forget to take into account the insurance, maintenance and gas to actually run the vehicle. Can you live with one car for a while? Can you sell your car and buy a $2,000 beater? Honest, it’ll get you to work exactly the same way – it’ll just be without the huge payments and debt. If you owe more than it’s worth, that’s your biggest clue you’ve got a problem. Sell it and finance the different for a short time. You’re better off owing $3,000 or so than $20,000 or more.
Buying lunch at work, fancy coffees and bottled water are history. For most people, this can add up to $200 or $300 a month if you really track it. But since it’s “only” $3 or $5 at a time, we seldom acknowledge it.
Dinner out is out: You shouldn’t see the inside of a restaurant for a while, but you’ll get to know your kitchen. Restaurant meals are 60 to 70% ambiance, markup and entertainment. That means that cooking your meals at home will cost you around 30% of what you’re spending in eating out right now.
Premium cable channels? Forget it. Think back – was there ever a time you “survived” with just the basic 40 or 50 channels?
Raise your insurance deductibles. You’d be surprised how much your premiums drop if you increase the deductibles on your car or home insurance. Make a quick call and find out. But then – you likely won’t have your cool car anymore, so it might be a mute point.
Get rid of your whole life policy. It was a really bad idea for a long time, anyway. Get a term policy for maybe a tenth of the cost for the same coverage.
Increase your income. Can you get a part time job or work some overtime? It shouldn’t take your energy away from decreasing your expenses, but raising your income has exactly the same impact. All this will do is make things twice as powerful if you’re able and willing to do what it takes.
Any one of these things by themselves won’t have much of an impact, but together they’ll make a huge difference. Facing a reset in the next year or so is pretty scary right now. It impacts our stress level and relationships. It’s decision time. Are you prepared to do what it takes to have what you want? Only you can decide. But it’s worth it and you’ll begin to feel much more powerful and in control starting on some of these steps on a pro-active basis. Start fighting and never give up and don’t let your American dream turn into the American nightmare.
Averages aren’t very meaningful because ever situation, bad ARM or financial picture is very different. But for over 223,000 families whose loan went into foreclosure in September, it’s often too late. Yet these aren’t just statistics on television - they’re real families and real lives.
If your loan is resetting in the next year or so, the onus is on you to get ready, organized, proactive and informed. Nobody will do it for you because nobody else has as much invested in solving this problem as you do. Knowledge is always better than hope alone. Hope alone is the worst financial strategy, all the wishing isn’t going to change things around and an Ostrich mentality won’t solve anything.
Here are four critical steps that can play a big part in possibly loosing your home or work your way through the interest rate reset you’re facing:
First and foremost, communicate with your lender. They are not in the foreclosure business and have no interest in owning your home. Yet almost half of all people don’t ever talk to their lender before foreclosure action starts. Your lender may well have ideas, programs or internal ways they don’t advertise publicly to help in some way and to work with you and your circumstances. If only you’d call.
Many states also have a local help and information hotline and the Homeownership Preservation Foundation has a national hotline at 888 995 HOPE. Remember that asking for help is NOT a sign of weakness – it’s exactly the opposite! It’s a sign that you’re prepared to do what it takes to come out of this as a winner.
Know the details about your loan. You have to have know or organize these five critical things:
Where are you at? Know your reset date, current payment and rate details
What’s your credit score? It’ll be the major factor in what rate you’ll be paying. After all, rate equals risk
What will the payment go to? Get the today rate and what new payment would be (even if your reset doesn’t happen for a while, you need to have a rough idea of what it’ll go to)
What’s your home value? There are a number of web sites to give you an idea, call a realtor or walk down the street for comparable homes currently for sale
Get your paperwork in order. This includes copies of your current insurance policy, last pay stub, last years’ tax return, proof of additional income such as child support, lease from a tenant
Get your credit score up: The: It’s Your Money book has an entire chapter on factors that impact, raise or drop your score. It is critical that your score gets as high as possible in the time you have left before your reset. According to Fair Isaac right now, a score of 760 or higher gets you the best rates. A score between 700 and 759 will cost you an extra 0.23% and an extra 0.5% if it’s between 660 and 699.
Some of the critical factors that impact your score include getting your credit card balances to less than 50% of your limits (ideally it’s 30% or less) and generally reducing your monthly payments and debt. Make absolutely sure all of your payments are current, no matter what, and don’t apply for any new credit until your loan is refinanced. Remember that a high credit score is way more about avoiding stupid mistakes than doing anything positive.
Get on a written budget and reduce your monthly expenditures. No matter what, your payment is going up and that money has to come from somewhere. Not only will a budget let you see exactly where all of your income is going, it’ll show you the places that are sucking out your money each month. Then you can decide if that expense or payment is more valuable than keeping your home. Because it’s always a choice of priorities – always. Here are a few money-leakers that will quickly add up to finding the extra money to be able to afford your new mortgage loan payment:
The car: This is likely your second biggest expense each month, never mind that most people forget to take into account the insurance, maintenance and gas to actually run the vehicle. Can you live with one car for a while? Can you sell your car and buy a $2,000 beater? Honest, it’ll get you to work exactly the same way – it’ll just be without the huge payments and debt. If you owe more than it’s worth, that’s your biggest clue you’ve got a problem. Sell it and finance the different for a short time. You’re better off owing $3,000 or so than $20,000 or more.
Buying lunch at work, fancy coffees and bottled water are history. For most people, this can add up to $200 or $300 a month if you really track it. But since it’s “only” $3 or $5 at a time, we seldom acknowledge it.
Dinner out is out: You shouldn’t see the inside of a restaurant for a while, but you’ll get to know your kitchen. Restaurant meals are 60 to 70% ambiance, markup and entertainment. That means that cooking your meals at home will cost you around 30% of what you’re spending in eating out right now.
Premium cable channels? Forget it. Think back – was there ever a time you “survived” with just the basic 40 or 50 channels?
Raise your insurance deductibles. You’d be surprised how much your premiums drop if you increase the deductibles on your car or home insurance. Make a quick call and find out. But then – you likely won’t have your cool car anymore, so it might be a mute point.
Get rid of your whole life policy. It was a really bad idea for a long time, anyway. Get a term policy for maybe a tenth of the cost for the same coverage.
Increase your income. Can you get a part time job or work some overtime? It shouldn’t take your energy away from decreasing your expenses, but raising your income has exactly the same impact. All this will do is make things twice as powerful if you’re able and willing to do what it takes.
Any one of these things by themselves won’t have much of an impact, but together they’ll make a huge difference. Facing a reset in the next year or so is pretty scary right now. It impacts our stress level and relationships. It’s decision time. Are you prepared to do what it takes to have what you want? Only you can decide. But it’s worth it and you’ll begin to feel much more powerful and in control starting on some of these steps on a pro-active basis. Start fighting and never give up and don’t let your American dream turn into the American nightmare.
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