 Chuck,
To cut to the chase, we have serious financial trouble. Our income dropped, so we now don't make enough to pay our current mortgage and all our other bills. If we didn't have our debt payments, we'd be okay. Our current mortgage offers the option to pay interest only or even less (it seems). What should we do to make sure we don't drown?! We've even considered selling our home if necessary.
Bob & Rebecca ('Stressed in TX')
Hi Stressed in TX,
I can definitely relate to your "wave of despair", one that is beginning to swamp tens of thousands of folks across the U.S. Because of the practice of over-aggressive lending (and borrowing), we're seeing a huge increase in troubled mortgages that are resulting in personal foreclosures and lender bankruptcies. This isn't only affecting those with poor credit -- it's also swallowing up those who stretched too far to purchase a home that was simply too expensive for them if their finances hiccupped.
It sounds like your loan is one commonly known as a "Pay Option ARM" since the borrower has the option to pay less than the fully amortized payment options. The four payment options are:
1) 30 year fixed 2) 15 year fixed 3) Interest only 4) Minimum payment (negative amortization)
These loans have a fixed rate for a time, and carry a hefty pre-payment penalty (better watch out for that) since the bank wants to ensure they at least get their expected interest. The negative amortizing option is definitely "going backwards" -- the monthly payment isn't enough to cover even the interest owed. I'm working with a California couple that now owes $18,000 more on their home now than one year ago due to their loan balance increasing.
My recommendation to begin turning the tide:
1) Pay the interest only amount for now to avoid negative amortization. This will minimize your mortgage temporarily and allow you to build a small emergency fund and eliminate some of your debt. Use the temporary relief to re-evaluate your situation and determine if you can get your income back up within the next two months. 2) If that doesn't look promising, do a pre-emptive strike and put your house on the market. If you're truly considering selling the house, you want to do it when you're not in desperation mode. 3) Build your Priority Based Budget. List your most important expenses at the top (mortgage, food, utilities, fuel, transportation, etc) and spend all your income on paper before any of it leaves your bank account. When you run out of money -- stop spending. Draw the line there until the next paycheck.
The answer is live to fight another day. If you're going to fall behind, do it with less important bills (credit card, unsecured loans, etc) and not the mortgage. This approach will hurt your credit score for a time (at this point, who cares?) but will ensure you have the best options to turn things around.
Be encouraged! Set your priority based plan, work it and adjust as necessary. I'm here if you need me. Let me know how you're doing.
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