Tuesday, May 26, 2009

Surviving The Mortgage Meltdown (by Dennis Estrada)

The housing market has severely weakened. There are many subprime mortgage lenders who are going out of business. To survive, some mortgage lenders lay off employees, cut down on business expenses, and closed down several mortgage centers. Unfortunately, many subprime lenders did not act fast enough.

Last year, the subprime mortgage loans accounted for twenty percent of the mortgage market. When the home prices were high, the mortgage lenders entice the borrowers with exotic mortgage like interest only mortgage, easy mortgage loan application, low introductory interest rate, piggyback second mortgage, and adjustable rate mortgage.

The subprime mortgage lenders had put the borrowers in a bigger house than the borrowers can afford. Interest rate goes high enough to cause panic, because the mortgage payments get higher as well. Suddenly, the borrowers were not able to afford to pay off the mortgage. Here are a few things to survive the mortgage meltdown.

Stay on top of the mortgage interest rate

At the end of the introductory low interest rate period, the interest rate will increase. It is important to be realistic on your financial status. In case of higher interest rate, the income of the borrower must be enough to cover the mortgage payment. At the same time, the borrower will be ready for the higher mortgage payment.

Watch closely on the trend of interest rate

Especially, the borrower uses an exotic mortgage like adjustable rate mortgage. Many borrowers do not fully understand how the adjustable rate mortgage works. With the adjustable rate mortgage, it is possible for negative amortization. Negative amortization happens when the mortgage payment does not cover the interest. Thereby, the mortgage payment does not pay off the mortgage.

Know the different mortgage refinancing options

The mortgage refinancing is a way to switch to another mortgage. Usually, the borrower switches on the drop of interest rate or at the end of the mortgage term. There are many mortgage refinancing options. The mortgage brokers will be able to direct the borrower for the best option. A drop of interest rate happens all the time. So, the borrower might be able to take advantage of the drop of interest rate.

Set aside funds for the emergency fund

It is a good idea for the borrower to set an emergency fund. The emergency fund is a set of funds for living expenses in case of loss of income. The general rule is three to six months of emergency fund. The idea is to buy time to get back on the good foot.

Consider to rent out for extra source of income

If there is an extra room, the borrower can rent out the extra room for extra source of income. The rent income may be able to cover the spike on mortgage payment. For example, some homeowners convert the garage into an extra accommodation. That would be perfect to rent out. Since the homeowners increase the ability for the property to create income, the home value appreciates as well.

Cover the loss of income with mortgage insurance

The loss of income is one of the reasons to miss the mortgage payments. The accidents, illnesses, or deaths cause loss of income on the family. It may be a stretch to repay the mortgage. The mortgage insurance will protect the family in case of accidents, illnesses, or deaths.

Realistic personal budget

The borrowers know their personal worth. Like anybody, the borrowers have several financial obligations. Discipline is the key to get back on the right foot. The borrower may be able to cut off unnecessary expenses. Then, the borrower will set a realistic personal budget to satisfy the financial obligations.

Dennis Estrada is a webmaster of mortgage calculators, mortgage meltdown, and mortgage refinancing website that gives access to many resources, and calculators for mortgage.

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