Q: My husband and I restructured our mortgage a few years ago when we were having trouble making the payments. The mortgage company agreed to reduce the payments for the first 10 years, but after that they are higher than ever. I'm starting to worry about it because things haven't gotten any better for us financially. Our house still isn't worth as much as we owe, so I'm wondering if we should just default on the loan now, rather than put another six years of payments into a property we're likely to lose anyway. What do you think?
A: It's a tough situation, but six years is a long time, and you may not want to give up just yet. Here are some variables you need to consider:
- How does your loan rate compare with current mortgage rates? Based on what you describe, you would have restructured your mortgage about four years ago, when mortgage rates were over half a point higher than today's mortgage rates. There may be even greater potential to reduce your mortgage rate if you have since cleared up any black marks on your credit history, so this is one possibility to look into.
- How do your mortgage payments compare with rental costs? Never view any financial decision in isolation, but rather in comparison with alternatives. In this case, you have to compare your current mortgage costs with what it would cost you to rent. Unless you would save a lot by renting, it argues for staying in the home at least until the step-up in payments comes closer.
- How far is your home's value from being above water? The home may not be worth what you owe now, but if it is getting closer there may be a realistic chance of it getting there within the next six years. That would give you a chance to sell before the higher payments hit, and walk away with some equity.
- How are your employment prospects? The job market is getting better, so depending on your health and your skills, there is a chance you could raise your income enough in six years to afford the higher payments.
- Is there room for any belt-tightening? You have probably already thought about this, but a ruthless round of budget cuts designed to make your mortgage a priority might allow you to build up enough of a reserve to cushion the impact of the increased payments.
You are right to be thinking ahead to when your payments expand, because you need a plan for dealing with that. However, there is still enough time for improving circumstances to put a viable plan more within your reach.
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