The mortgage crisis seems to be headline news on a daily basis now. What seems to be driving the free fall? There are two key factors in play. First is the number of loans that are adjusting upwards. Many people took out adjustable rate mortgages with low “teaser rates” that are adjusting to market rates. Even though interest rates are low, the regular rate is still higher than the teaser rate that is causing “payment shock” for many homeowners. The second reason is that home values in many markets continue to decline. These markets are flooded with foreclosures and people looking to get out of a home they can no longer afford. This growing supply of homes far outweighs the current demand that is causing prices and values to fall.
What is a homeowner to do? Pay down your principal balance before your payment jumps up! Paying down your balance on an adjustable rate mortgage will lower the amount of your new mortgage payment when your rate adjusts – often times lowering your payment amount even when rates move up. Paying down your balance also helps to maintain equity in your home.
No one knows for sure how long this poor mortgage market will last, but it will not last forever. When markets finally adjust to normal growth rates, those who have paid down the principal will benefit most by having more available equity to use on moving up to a bigger home or leverage for significant expenses like college or home improvements.
