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By Holden Lewis Bankrate.com, November 9, 2006 - In the next couple of years, a combination of rising mortgage interest rates and falling home values could plunge thousands of homeowners underwater. Being underwater means owing more than the house is worth. It's an especially risky situation for people with interest-only mortgages and pay-option adjustable-rate mortgages. Some might be able to refinance or get through hard times by living frugally. Others will have to sell their houses, possibly at a loss. Still others will lose their houses to foreclosure. If you have an interest-only or pay-option ARM, assess your situation and, if you conclude that you are in jeopardy, act quickly. Most homeowners will sail through just fine. Two groups of borrowers should look ahead to see if they're heading toward a reef that could sink them. Pay-option ARMs are adjustable-rate mortgages that allow borrowers to decide how much to pay each month. Under some conditions, the minimum payment doesn't even cover that month's interest, so the loan balance rises. According to an analysis by Comstock Partners, a Yardley, Pa.-based asset management company, 70 percent of borrowers who took out pay-option ARMs in the last year owe more now than they did when they got the loans. Fathoming the water's depth A lot of people are understanding their predicament only now. As short-term interest rates have risen in the last two years, the underlying rates of interest-only and option ARMs have gone up, too. Sooner or later, the minimum monthly payments could rise abruptly, past the point of comfort. It's time to refinance, if possible. (It might be impossible to refinance if you are underwater and you don't have cash to spare.) Lots of refi choices There are plenty of loans to choose -- from plain-vanilla 30-year, fixed-rate mortgages to 40-year loans to hybrid ARMs that give you a three- or five-year fixed-rate period before the annual adjustments begin, to more esoteric programs. Michael Moskowitz, president of Equity Now, a mortgage lender in New York City, touts a relatively new product, the 30-year, fixed-rate loan in which the payments are interest-only in the first 10 years. "For someone who is long-term in the house -- really long-term -- this is the best product," he says. Such a loan comes with a big payment shock after the loan's 10th anniversary. By that time, Moskowitz says, the borrower's income has risen enough to handle the higher payment, or the homeowner has refinanced the loan or sold the house. If you aren't yet 30 days late in making a house payment, but you're worried that you soon will be, don't let the customer service rep brush you off by telling you that no help is available until your payment is a month overdue. Sell the house Depending on your situation and whether the originating lender sold the loan, the servicer might give you a break on the mortgage payments in exchange for putting the home on the market immediately. Short sales make a comeback There is a type of sale called a "short sale," in which the house is sold for less than the mortgage balance, and the difference is either forgiven or paid off over time. You can't do a short sale without the cooperation of the lender. If you can afford to -- and you probably can't afford not to -- hire an attorney to negotiate the details of a short sale with the lender. A short sale can be painful, but it's not as bad as a foreclosure, when the borrower is evicted from the house and it is sold, often at auction. In many cases, a foreclosure can be traced to a lack of communication between the borrower and lender. No one wants to sell a house that's underwater. |
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