How to handle a reality check

Published October 2, 2006

Do you have an adjustable rate mortgage? If so, it's time to start thinking about the inevitable. Because interest rates have been going up, your payment will, too.

"It's time for a reality check," said Bankrate.com senior analyst Greg McBride. "You have to be proactive about this. You can't wait until your payment jumps several hundred dollars a month before you start thinking about what to do."

Here are steps you can take:

- Review the terms of the mortgage to be sure you understand them. How long will the initial interest rate last? How frequently could it change? How high could it go? If you have payment options, how do they work? Could you end up owing more than you do now? Is there a prepayment penalty?

- Don't go negative. If you have an option ARM (an adjustable mortgage that can offer payments lower than interest-only) and always make the minimum payment, your mortgage balance will grow each month and eventually trigger higher payments. The remedy: Make extra large payments one or more times per year. That way you can pay down some or all of the interest that's been added to your balance.

- Consider refinancing. If you're planning to stay in your home for at least a few more years, refinancing with a fixed-rate mortgage is a winning idea. You can lock in relatively low rates.

But what if you're having problems making your payments? Here are some additional options:

- Get help. Don't just let your payments slide and ruin your credit. Make an appointment with a government-approved housing counseling agency. (Call toll-free 1-800-569-4287 for the location of one near you.) Another source of help is the Homeownership Preservation Foundation. (Call toll-free 1-888-995-4673 or go to www.995hope.org.)

- Keep in touch with your lender. Explain your problems and work with your lender. You may be able to modify the terms of your mortgage.

- Sell. Downsizing to a less-expensive house may be the most realistic option if you're in a house you can't afford. To protect your credit, continue your payments while the house is on the market.

- Watch out for scams. Don't sign papers you don't understand. Your lender may agree to accept the deed as an alternative to foreclosure, but simply deeding the house to someone else will not relieve you of the obligation on the mortgage.

- Consider filing Chapter 13 bankruptcy as a last resort. This type of filing will give you a chance to make up past-due payments and save your house from foreclosure.