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How to Survive the Mortgage Crisis
Three Reasons Not to Refinance


How to Survive the Mortgage Crisis

Tom Kerr

The current mortgage crisis is creating some horrific history; but you don't have to become one of the depressing statistics. Protect yourself from financial calamity by understanding your mortgage, being honest with your lender, and respecting your budgetary limitations.

While the root cause of the current credit crisis and housing turmoil can be traced to a wide variety of factors-including some predatory lending practices-hindsight is always sharper than foresight. In order to act now to guard yourself from the looming threat of this mortgage chaos, it's imperative that you first get to know your home loan so that you can make appropriate financial decisions.

Tips for home mortgage protection

Here are some ways to protect yourself:

  • If you have an adjustable rate mortgage, strongly consider refinancing out of it into a safer and more dependable fixed-rate variety. Otherwise, rates could spike and leave you with an unwieldy monthly payment.
  • Paying interest only is extremely risky, because you can make payments for years without effectively reducing your overall mortgage debt. Avoid interest-only or negative amortization loans like the plague during this current real estate climate.
  • If you're facing foreclosure, seek out professional financial guidance from your lender or from a credit counseling agency. Lenders are eager to avoid defaults, and may be willing to work out new mortgage terms to help you weather the storm.
  • Your current lender may penalize you for paying off your mortgage early, so before you refinance, check the small print on your loan documents. If necessary, ask your lender to waive that requirement. Some consumers have succeeded in getting those penalties removed, so challenging them is well worth the effort.

How much mortgage can you afford?

One of the fundamental factors in managing debt-and all mortgages represent significant debt-is to have a clear picture of how much you can afford. Leveraging debt can be a great way to increase your wealth and financial security, or it can be a surefire recipe for disaster. Not long ago, the mortgage industry applied a 4-to-1 formula to determine whether a consumer was qualified to repay a home loan. If your monthly income was four times as much as your mortgage, you were in a strong position. But in recent years, lenders and borrowers threw caution to the wind in order to justify paying for increasingly expensive houses. Today, it's not uncommon for a homeowner to spend half of her income on her mortgage, and that's entirely too much debt for a sensible consumer. If your mortgage uses up a third of your budget, you may want to figure out a way to refinance to lower it. If you pay more than that, you need to rework your budget to avoid dangerous pitfalls that can happen if your mortgage rate jumps, your income falls, or your home's equity shrinks.

Improving your working knowledge of mortgages, and how they can create problems, will help you both now and in the future.

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