Are you having problems paying a monthly mortgage payment? Are you living in fear of default? Here are some of the warning signs that your mortgage is a time bomb waiting to go off.
The first is the size of your mortgage payment. If your payment is more than third of your monthly take-home pay, it is too large. Most economists agree that a payment that exceeds one-third of take-home pay puts too large a strain on the monthly budget. Here is a calculator that will allow you to determine the appropriate amount for a mortgage payment based on your income. There is not enough room in the money that is left over to cover living expenses, other debt payments and savings for emergencies.
In this current economy, it is not uncommon for take-home pay to decrease as lay-offs and cut-backs in overtime. That may result in the monthly mortgage payment actually growing to a greater percentage of income even though the payment is fixed.
The second is the variable rate loan. Right now interest rates are historic lows, but someday rates will increase. When that happens, the monthly payment will increase as the interest rate increases. If at all possible, consider what the maximum payment would be if the interest rate on your loan increases to its maximum.
The theory in making such loans was that income and real estate values always increases so that such changes would not be a problem. Recent history shows us that this assumption is not always true.
Another waring sign is the payment option adjustable rate mortgage or POARM. In this type of mortgage, not only does the interest rate change, but you are given the option of paying the full principle and interest, interest only, some part of the interest, or nothing at all. The danger is in paying anything less than the full principal and interest every month.
If you pay interest only, the balance of the loan never goes down. So as the value of the property continues to decrease, your loan balance doesn't reducing your equity in the property. If you pay a partial payment or skip a payment, the accrued interest is added to the balance of your loan. Instead of making the balance go down, it is going up.
Worse yet, that larger balance means a larger interest payment for the following month. Soon, you reach the point of no return when the interest payment exceeds your ability to pay or the principal balance grows larger than the value of the property.
Another item to watch if the frequency of when interest rates change. Most adjustable rate mortgages change rates once a year, but some change every six months or in other cases, monthly. With a monthly change, your mortgage is essentially a credit card account backed by your home.
The difference between a 30 year mortgage payment and a 15 year mortgage payment is smaller than you think. If you have a fixed rate loan with a 15 year life, you are probably guarded against loss of value in real estate and the fluctuations in income for your family budget. Plus, you stand a chance of paying off that loan in your lifetime.
by Eugene S. Melchionne· Posted in Personal Finance