Three options that may help you find freedom from an overwhelming mortgage
With a little research and planning, you can find the right way to reduce financial burdens for your family.
According to the Consumer Financial Protection Bureau’s (CFPB) Your Home Loan Toolkit, your mortgage payment should not be higher than 28 percent of your income before taxes. This number does not include your student loans, car payment, credit cards or other debt. The term “debt load” may be more accurate than you thought.
If your mortgage payment is too high, your home may be your “castle,” but you may feel like you live in the dungeon. Before you despair, there may be options to find freedom. It may help to use a simple worksheet to add up your current debt and calculate your debt-to-income ratio. The formula is:
Monthly Debt Payments / Monthly Take-Home Pay = Debt Ratio (%)
If your ratio is greater than 20 percent, you are operating at a dangerous debt level. In fact if your ratio is greater than 43 percent after adding your mortgage payment, you may be in serious trouble. Ability-to-repay is a significant factor in lending decisions. If you are overwhelmed, what are some options?
One option may be to pay more on your mortgage now. This will save money on interest and you will be free from the payment sooner. Using a mortgage loan payoff calculator like the one at bankrate.com can be very helpful. Using their example, if your current monthly mortgage payment is $1,013.37 per month and you have 25 years left on a 30 year, $200,000 mortgage at 4.5 percent interest, you can shave almost 4 years off your loan payments by increasing your monthly payment by $100.00 to $1,113.37. However, to come up with the extra $100, you may have to cut other expenses.
Tracking your monthly expenses and creating a spending plan will help you figure out if there is anywhere to find extra money. Also, be sure that you do not have a prepayment penalty. To learn more about tracking expenses and creating a spending plan visit mimoneyhealth.org. If you are unable to find extra money, it is time to look back at your Debt to income worksheet.
Another option to help you escape from an overwhelming mortgage is to reduce or eliminate the other debt. If you can pay off even one debt, the money used for the monthly payment can be either tacked onto your mortgage payment or used elsewhere in your spending plan to meet needs that were going unmet. There are several ways to attack debt. You can sell something and use the money to pay off or reduce the balances. You can use a plan to pay off high interest debt first then work your way down, or you can use the “snowball” method of paying the debt with the lowest balance first, building momentum then attacking the next biggest with the extra cash and so on down the line.
There are some online programs and phone apps that may help you put one of these plans into action. One place to visit is powerpay.org . However, there are many options available. Just do a little research.
A third option that may help you find freedom from an overwhelming mortgage is to increase your income. Start with a short-term goal like getting a part-time job. Can you set aside part of your summer, evenings, weekends or holiday season? If you set a time limit on the job, you may be able to find the time to do it. Like the example above, if you could find an extra $100.00 per month, it can substantially reduce your interest payments and mortgage term. What if you were able to earn $1,200.00 at a part-time job over the Christmas holiday? You would have one year of the extra payment in the bank (assuming you save it), or maybe you could pay off one of your other debts and eliminate the payment.
While you are working your part-time job, you may discover new skills and interests. Dust off your résumé and start looking for a more rewarding and higher paying career.
Making financial changes takes time, patience, and discipline. Sometimes it helps to have help from a professional. To contact an expert in your area, visit http://expert.msue.msu.edu, or call 888-MSUE4MI (888-678-3464).