Mortgage Risk Mitigation Strategies For Homeowners

>No one wants to lose their home to foreclosure. Once you get behind on your mortgage payments it is a very slippery slope to foreclosure where your problems grow quickly and your options become restricted as time passes. How can you reduce your risk of foreclosure? You can mitigate your mortgage risk if you:

1. can identify mortgage risks.
2. consciously reduce your mortgage risk exposure by making conservative, smart decisions during the entire process of planning for and closing on your mortgage.
3. regularly monitor that your mortgage payments are being correctly applied and that all of your mortgage related commitments are acknowledged as being met in a timely fashion.
4. manage your mortgage and finances conservatively and avoid the trap of bad financial management.
5. regularly look ahead to your financial future for potential problems or opportunities.
6. take decisive action to mitigate mortgage threats that have become increasingly probable or that have already begun to materialize before they snowball into an intractable problem.

Looking Ahead To Your Financial Future

The bad news is that no one can perfectly predict their financial future. The good news is that you can respond to many conditions in a way that makes a good financial outcome more probable. Homeowners who regularly monitor the news and other trusted sources for trends in mortgage interest rates and housing market conditions may be able to take advantage of potential opportunities or limit the damage caused by impending problems. Today we are blessed with an abundance of easily accessible sources for financial news and home values so there is really no excuse to not regularly monitor them. In looking ahead prudent borrowers will consider trends in their career planning, insurance coverage and adjust their budgets accordingly. If you know you have a big change in income or expenses on the horizon you should adjust your plans accordingly. Large medical expenses that are not covered by insurance can be a significant challenge for homeowners.

Be An Action Hero

The stress of making on time mortgage payments can be overwhelming when you are dealing with big problems like losing your job, temporary or permanent disability, and high medical expenses. Some people turn inward when faced with too much stress - procrastinating, not opening mail fearing that it might contain more bad news. However, this is the time for decisive action when you must energetically battle your financial demons. Here are some potential problems and opportunities and actions you could considering responding with in order to mitigate your mortgage risk:

If your home equity is in danger of declining, due to a decline in the value of your home or other factors, you may be able to mitigate your mortgage risk by considering one or more of the following actions, as is appropriate to your situation:

• make extra payments on your mortgage.
• refrain from taking out a second mortgage.
• refrain from adding to the balance of your HELOC if you have one.
• get a home loan modification for homeowners with underwater mortgages.
• sell your home while you still have some equity, if you are in danger of being underwater on your mortgage.

If interest rates are rising and you have an Adjustable Rate Mortgage (ARM), Interest-Only ARM, HELOC or balloon payment mortgage, you should:

• make sure you thoroughly understand the interest rate caps on your loan, the worst case scenario for mortgage payments and how long you plan on staying in your home.
• consider refinancing to a fixed rate mortgage.

If interest rates are falling and you have:

• a fixed rate mortgage, you may consider refinancing if the breakeven on the new mortgage is significantly shorter than the length of time that you plan to stay in the home.
• an ARM, interest-only ARM and the interest rate is below the floor rate on your mortgage, you may wish to refinance to a fixed rate mortgage. Consider the impact on principal balance and your other goals.

If you have an ARM, Interest-Only ARM or HELOC adjusting soon or a balloon payment due soon, consider refinancing your ARM, Interest-Only ARM, HELOC or balloon mortgage to a fixed rate mortgage.

If you have missed mortgage payments, due to poor financial management or other factors, then you need to rectify the situation right away by taking action, including the following:

• catch up on the missing payments, including any penalties or fees.
• communicate promptly and clearly with your mortgage servicer.
• get control over your finances.
• seek the advice of experts and people you trust.
• consult with a lawyer regarding any legal protections that may be available to you.

If you or your dependents are engaging in riskier activity, for example your child is entering his or her teenage years, you could explore compensating by:

• ensuring you are adequately covered by insurance;
• reducing your mortgage risk exposure by refinancing your ARM, interest-only ARM, HELOC or balloon mortgage to a fixed rate mortgage.

If you expect to receive a financial windfall:

• explore paying off high interest debt;
• consider making extra payments on your mortgage.

If large expenses loom on the horizon, for example medical expenses, explore a wide range of options, including:

• evaluate your insurance coverage.
• evaluate whether a cash-out refinance makes sense for you.
• raise funds from alternative sources.
• work out a payment plan in advance.
• reduce your other expenses.

The best decision for you depends on your unique circumstances. Invest in educating yourself, consult with people your trust, get out in front of potential problems, and consider your whole financial picture when making decisions.