Mortgage reset: Try to work it out; don't just walk away
— -- Q: Our mortgage resets in about three years and our lender won't work with us to restructure the loan. We can't sell the house, seeing that we owe more than the home is worth. What should we do?
A: Ask Matt is more of a place to ask about stock investing. But since your question is probably on the minds of many readers, I'll offer some suggestions.
What you're going through is at the crux of the nation's banking crisis. Home buyers assuming home prices would only rise, agreed to mortgages that were too pricey for them. Interest rate resets only complicated matters, causing already expensive mortgage payments to become prohibitively expensive as rates reset from low initial rates.
And the problem is getting worse. As homeowners get hit with higher payments — or now, lose their jobs — many are tossing the keys back to the lender and leaving homes abandoned. Not only does that increase the supply of homes for sale, it also leads to abandoned properties. Both pull home values down further.
What should you do? Here are just a few suggestions:
•Consult a professional. Real estate is so local and personal, think about consulting real estate and financial professionals in your area. Are you certain your property would be so hard to sell? Maybe there's something about it that will let you recoup enough to pay back the loan.
•Decide if you really can't afford the mortgage. Consider consulting a financial planner who can help you decide if you can afford the mortgage when it resets. Maybe by making some household budget changes, you can continue to make the mortgage payments.
• Find another lender. While your mortgage lender may not be willing to reduce your payments, perhaps another lender would would. Check with all the big banks to see what options they might provide. Start this soon, though, since they're all swamped with business.
•Wait. Keep paying your current interest payments and hope the housing market turns around before your rates reset.
• Ask for family help. Talk to family and friends about helping you out. One possibility might be to sell an ownership stake in the house to a family member. You can then use the cash to help make the payments when the rate resets. Sometimes family members are looking for ways to invest in property.
Notice I didn't list walking away from the home as an option. Unfortunately, that's the first thing some people think to do when a home purchase goes bad. And, in severe cases, that may be the only course of action. But doing so will shred your credit for years and force you into being a renter.
Try to be creative. Clearly, when you bought the property you assumed you could afford it. Remember the assumptions you made then and see if there's any way to make them work.
Finally, we're talking about a very individual issue here. It might be worthwhile to pay an expert a few hundred bucks to look over your financial affairs and give you some suggestions based on your specific situation. Don't just walk away from the property until you at least give a good honest go at sticking to the mortgage you signed up for.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns.