If you're among the many homeowners now straining under the weight of a housing payment that’s too high, you're not doing yourself any favors by ignoring the problem.
If you’re short changing other goals, such as saving for retirement, that's a sign it might be time to rethink what you’re doing. Instead, try the following strategies to avoid having your home wreck your finances.
Is your housing stress the result of a short-term problem that could reverse itself soon, such as a layoff or an illness that triggered unwieldy healthcare costs?
Or, does the strain result from a more fundamental problem, such as over optimism about the real estate market or miscalculation of what you could afford based on your income? The answer will dictate your best strategy (see below).
If it's a temporary crunch, the solution may be as simple as rethinking your spending. One way is to examine six months of bank and credit card statements to discover areas where you can cut back on spending.
Some common items to cut: health club memberships, vacations and gift giving. Did you get a tax refund this year? Try reducing your withholding tax, so you'll take home more money in your paycheck.
In fact, finding a few extra hundred dollars in your budget can go a long way even if your financial situation isn't likely to change soon.
When the problem isn't temporary and you've already trimmed your budget as thin as possible, you may need to consider more drastic moves.
If you have both a variable-rate home equity line of credit and a primary mortgage, you may save hundreds of dollars a month by refinancing both balances into one new fixed-rate loan.
A $200,000 fixed-rate mortgage at 6 percent, plus a $100,000 HELOC at 9.25 percent, works out to total monthly costs of about $2,230.
Roll that entire $300,000 into a 30-year fixed-rate loan at today's rates, and your payment will be $1,800 or so, a savings of about $450 a month.
That will quickly offset the cost of the refinance. Also you should consider refinancing if your credit has improved; or you simply didn't get a good deal the first time around.
If you currently have a 15-year mortgage or are more than 10 years into a 30-year loan, stretching out the payments will save you money now, though you'll pay more interest in the long run.
If refinancing isn't a solution, and you think you might not be able to make your monthly payment, call your lender immediately and ask about a temporary reduced payment schedule, known as forbearance.
The last thing a lender wants is to foreclose since they run the risk of losing money. Keep in mind that your lender isn't obliged to give you a break, but you have a good chance if you can prove financial need and have a plan to get back on track. And you'll avoid a ding on your credit score.
When no amount of budgeting and strategizing will alleviate your housing stress, it's time to consider moving on. The good news is if you have owned your home for several years, you may still be able to sell at a profit. This will keep your credit rating intact and position you to own another home in the future.
