What to Do if You're in Too Deep
by Carla Fried

April 13, 2007

[Continued, page 2]

Size Up Your Situation

Is your housing stress the result of a short-term problem that could reverse itself soon, such as a layoff or an illness that triggered unwieldy health-care costs? Or does the strain result from a more fundamental problem, such as overoptimism about the real estate market or miscalculation of what you could afford based on your income? The answer will dictate your best strategy (see below).

If the Stress is Temporary:

The solution may be as simple as rethinking your spending. Munroe makes clients scour six months of bank and credit-card statements for fat-trimming possibilities. Some common items to cut: health-club memberships, vacations and gift-giving largesse. Got a tax refund this year? Try reducing your withholding so you'll take home more money in your paycheck each month. In fact, finding a few extra hundred dollars in your budget can go a long way even if your financial situation isn't likely to change soon.

If You Need a Permanent Fix:

When the problem isn't temporary and you've already trimmed your budget thinner than a slice of prosciutto, you may need to consider more drastic moves. If you have both a variable-rate home equity line of credit and a primary mortgage, you may save hundreds of dollars a month by refinancing into one new fixed-rate loan that ropes in both balances. A $200,000 fixed-rate mortgage at 6%, plus a $100,000 HELOC at 9.25%, works out to total monthly costs of about $2,230. Roll that entire $300,000 into a 30-year fixed-rate loan at today's rates and your payment will be $1,800 or so, a savings of about $450 a month. That will quickly offset the cost of the refi, typically a few thousand dollars.

You should also consider refinancing if your credit has improved or you simply didn't get a good deal the first time around. If you currently have a 15-year mortgage or are more than 10 years into a 30-year loan, stretching out the payments will save you money now, though you'll pay more interest in the long run. When they got their first loan, Andrew and Lynnette Belyea of Norfolk had little credit history and didn't shop around. After establishing a record of on-time payments, they were able to refinance and reduce their mortgage costs by about $350 a month. "The first time, I rushed," says Andrew. "This time I did my homework and got a much better rate."

Ask for a Lending Hand

If refinancing isn't a solution and you think you might not be able to make your monthly payment, call your lender immediately and ask about a temporary reduced payment schedule, known as forbearance. "The last thing a lender wants is to foreclose; they run the risk of losing money," says Erica Sandberg, a spokeswoman for the Consumer Credit Counseling Service of San Francisco. Keep in mind that your lender isn't obliged to give you a break. But you have a good shot if you can prove financial need and have a plan to get back on track. And you'll avoid a ding on your credit score.

Move On

When no amount of budgeting and strategizing will alleviate your housing stress, it's time to consider moving on. The good news is that if you have owned your home for several years, you may still be able to sell at a profit. The Apostolaches sold their home last year, pocketing $35,000 after expenses. For the moment the couple and their two children are living with Ana's parents. It's a squeeze, but Bo, now working at his father's electronics company, says he thinks they'll be able to buy another home within a year or so. And the couple insist they have learned their lesson. Says Bo: "The new place won't be as impressive as the last house, but it will be one that we can afford."

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