Smart decisions upfront prevent future foreclosure

LOS ANGELES (11/6/07)--One out of every 200 households faced a possible foreclosure in the past three months--that's almost 447,000 homes nationwide (Associated Press via USA Today Nov. 1).

Many homeowners are in this situation because they're starting to see rate increases in the adjustable-rate mortgage they took out a year or two ago. The best way to prevent foreclosure is to protect yourself--and your home--before you sign the loan documents.

Make smart decisions now to save your home later (CUNA's Center for Personal Finance):

• Buy a mortgage, not a mortgage payment. Depending on what type of loan you get, an affordable monthly payment now may not be so affordable in the future as rates increase. With most loans, over time, your total monthly payment most likely will go up as property taxes and insurance premiums rise. Also, if you take out a mortgage for an extended period of time--more than the traditional 30 years--interest costs will be higher than with shorter terms.
• Don't overextend yourself. Just because you're approved for a certain loan amount doesn't mean you can afford it. One helpful guideline many lenders use is that your mortgage payment should amount to no more than 33% of your monthly gross income (income before taxes, Social Security, and other deductions). Another guideline is that principal, interest, property taxes, and insurance--plus your total long-term debt load such as car payments, college loans, and installment payments--shouldn't exceed 38% of your gross income.
• Know the details. Make sure you understand your loan terms, including if and when the payment could increase and how high it could go.
• Start an emergency fund. Putting money aside in a special account just for emergencies can help drastically if you or your spouse or partner is laid off, becomes unable to work for a while, or if other unplanned expenses happen. Having enough saved to make a couple of month's worth of mortgage payments could be the difference between being able to stay in your home or losing it.

Talk to the professionals at your credit union. They can give advice about a loan or help with a budget so you can afford your mortgage.

For more information, read "Lenders, Counselors Help Homeowners Avoid Foreclosure" and "What to Do When Your ARM is Due" in Home & Family Finance Resource Center.

courtesy of cuna.org