How to Bounce Back from a Bad Housing Market

Some people have been living a little beyond their means because the credit markets a few years ago were relatively easy to penetrate. Easy credit was at our disposal. Simply owning a home and knowing that you could tap into your home’s equity once the credit card balances go a bit too high was the norm for some people. This gamble has seemingly dissipated overnight and the credit crunch, followed by the collapse in subprime lending has become dire everyday. The crunch has essentially put an end to the house as a piggybank, as well as other borrowing tactics, such as swapping from one 0 percent teaser rate to another and finding cut-rate financing for your next luxury car. There are a lot of people who are in over their heads, who make very good incomes. Strategically managing your personal finance is becoming harder.

Difficulty: Moderate

Instructions

Things You'll Need:

• Financial statements
• Mortgage papers
• Internet

1. Reset your priorities. The best system to live by is to pay yourself first from your income and put money away in a 401(k) plan regularly. Sometimes that may not work if you are strapped. The best thing you can do is to defer savings and instead put every available cent into paying off debt until you get your finances under control. You can’t max out your 401(k) when you are behind on your mortgage or car payment.

2. Stretch it out. If you own a house and you are tapped out, lowering your payments with a 40-year mortgage could be a good move. You will wind up spending more in interest charges, but if the alternative is falling behind on your bills and watching your credit score take a nosedive or in the worst case scenario, having to sell your house in a falling market, a longer mortgage is the lesser of two evils. A longer mortgage payment schedule is also a good option if your mortgage is an adjustable rate loan that is about to reset, or you are facing the reset of an interest-only mortgage that had a low up-front rate and the switch to a conventional mortgage will be hard to handle every month. Once your financial situation improves, refinance your mortgage to better terms. You can also extend the payment schedule on your car loan, from 36 months to 60, for example, until you get your finances back on track. This makes the most sense if you will keep the vehicle for a long time.

3. Shop for the best rates. If you are going to be borrowing money in this tighter credit market, you have to shop around more than ever for a good deal, particularly on a mortgage or home equity loan. For the best deals, shop locally. You may do better with a regional or savings and loan that underwrites mortgages rather than at a national lender that repackages loans for institutional investors.

Tips & Warnings

• Keep your payments current. If you are behind on your mortgage, call your lender right away. Ignoring the problem doesn't make it go away.
• Make at least the minimum payments on your credit cards until your financial situation improves.
• Refinance your automobile loan to get a longer term, if you are in jeopardy of falling behind.
• Research, research, research to find better deals if you need to borrow money.
• If all else fails and you are too far behind, contact a credit counseling service such as CCCS to see if they can help you.
• When all else fails, bankruptcy may be your last resort.
• Do not ignore your mortgage lender's phone calls if you are behind on your mortgage. The company will work with you. They really don't want to foreclose because it is very expensive for the lender to do.