As I begin writing this column I must admit two things: I never thought I would ever have to write a column like this and I believe that as bad as the credit and financial system in the United States looks at this time, it will make a full recovery and we will be able to move past this exceptionally painful period in our nations history. Before I lay out some rules that you need to consider I want to point out some things you should not be doing based on your fears. Remember, the events that are now happening are far worse than the majority of people felt would be and nobody has a crystal ball for the future. Hedge funds are being hurt, and thus being forced to liquidate heavily, because of their heavily leveraged positions. The same leverage that made them so successful on the upside and reared its ugly head and is”killing” them on the downside. Also the excesses which helped create the bubble on the upside are doing the same on the downside. The message is simply: stay positive and take care of what you need to do. Now let's take a look at some simple rules.
If you have a current mortgage that will be coming due in the next year or two that has a great rate, leave it alone (unless you absolutely need to get cash or you simply cannot keep paying on the mortgage). Too many people are predicting dire consequences for the future and want to trade in their 5 or 7 year arm (with a year or more left) into a fixed rate with higher interest. This is not a smart idea. The one thing you can control is paying down your mortgage. What you can't control is the interest rates. Pay down your mortgage if you are concerned about the future and do not raise your interest rate by refinancing for a longer term at this time.
Do not go to one of the many companies that have sprung up to help you negotiate with your lender. All lenders are aware that their borrowers are in trouble and will work with you. (I will get into this in greater detail). Paying someone to do the negotiations is throwing money away. You were able to get your own mortgage, you are able to negotiate a better situation for yourself with your lender.
Do not walk away from your house if it is at all possible. Aside from the obvious ruination of your credit, it just isn't a good practical or financial idea. Everything, for the most part, will return to normalcy in a month, a year or three to five years. Regardless of the time it will happen. The unbelievable amount of money that is being pumped into our country's credit markets and worldwide as well will insure a return of inflation in the years to come and real estate is a wonderful inflationary hedge. If you can't negotiate a better payment for yourself you can rent out some or all of the house, you can offer a lease option to the market which if priced right should move quickly. You can try to sell the house on as favorable terms as possible. Walking away is way down the list and if you are determined to stay I believe you will be able to stay.
Now the list of what you should do at this time if you are having problems:
1. Decide what is the most important asset you have and move to save that first. For most people it will be your house, but for some it could be their car or something else. List all of your assets and be sure to leave nothing out.
2. Figure out what you are currently making, gross figures, not net and put that down. Do not be optimistic or pessimistic. Be realistic. I want you to show “Gross” figures because you may be able to solve a portion or even all of your deficit by changing your deductions. Too many people overlook this simple solution.
3. Rank all your debts in order of importance to you. We are in a nation where credit is important. Which credit card(s) is most important to you? Which cards can you live without?
4. Make sure your spouse or significant other is with you through this entire exercise. You absolutely need a joint effort and you cannot right the ship if one is rowing and the other is adding water to the vessel.
5. Make a budget as it is today. This budget will show a deficit, or you are not in trouble. Once you have your budget you can see where the problems lie and you know exactly what it will take to make it work.
Next prepare a paper that you will send to your lender, if that is your most important asset and probably the biggest problem. After you talk with the lender send them in writing your budget and let them see what they need to do to keep you going. This isn't a major production but it will work as well as if you had a CPA prepare it for you. Lenders do not want your house back. Lenders want you to stay and will work with you.
Lastly once your house payment is under control take on each and every credit card company and steadfastly refuse to pay unconscionable interest. If they won't budge stop using that card. You cannot afford interest in the high teens or even higher. Remember if everyone said no to the ridiculous interest they are charging they would come down quickly.
In closing, you need one thing more than anything else. This is the missing ingredient in your life or you wouldn't be in this horrible financial position. RESERVES! I have been writing about them for years and for years people have ignored the advice and now they have suffered. As you recover financially it is time to add reserves to your equation to insure this won't ever happen again. I, for one, believe you can come back better than you were and that come back begins today. Good Luck!