How to Protect Yourself From Mortgage Defaults

Sheryl Landrum
LoanBiz Columnist


California and much of the nation saw record home loan refinancing and new home purchases in the last few years. However, with a housing slow-down many homeowners are now discovering they can't afford their monthly mortgage payments and are letting their home loans go into default. How did this happen and how can you prevent it from happing to you?

In the last quarter of 2006, home foreclosures in California were up nearly 77% from the previous quarter. Two reasons we are seeing more home loan foreclosures are:

• In the past few years many borrowers opted for adjustable rate mortgages with low teaser rates. Now, with the teaser rates expiring on their home loans and higher interest rates taking their place, many homeowners are finding themselves with monthly house payments they can't afford.
• Many homeowners also sought 100% financing on their homes and/or became accustomed to refinancing their homes for extra cash. Now with home prices staying steady, or depreciating, these borrowers are finding themselves unable to refinance and without access to cash to maintain their mortgages and their lifestyles. In a softening housing market these homeowners are also finding it difficult to sell their homes to satisfy debt.

Avoid Foreclosure

What can you do to protect yourself from being a home foreclosure statistic? If you have an adjustable mortgage, you need to look at when it expires and what your new payment will be when it does. Thirty-year fixed rate mortgage rates are lower than most ARM products and with interest-only options available on them as well, you might find yourself with a less risky, more affordable home loan. Secondly, if you have, or are looking at, 100% financing on a home, be careful and have a plan. Don't rely on your home appreciating and refinancing to lower interest rates to afford your mortgage loan a year from now; you may find yourself facing foreclosure if you do.

Take these wise precautions, and you'll avoid the current mortgage default trend.

Source
"State Mortgage Default Rates at Eight-Year High, Firm Says," The San Diego Union Tribune (January 25, 2007)

About the Author
Sheryl Landrum is a Senior Loan Officer with First Capital Mortgage in San Diego and Prudential Realty in Bonsall, California.