Why are so many in trouble with their mortgage?

If you are having trouble making your mortgage payments, you are not alone. Millions of homeowners are in the same boat. Some because of job loss, divorce or medical problems, but many more because of the mortgage they were sold.

In the recent heyday of easy mortgages a lot of homeowners were sold products they really did not understand. They were sold a low monthly payment that was going to adjust to a much higher one or sold on a minimum payment that is actually adding to the amount owed on the property, known as a reverse amortization mortgage. This was based on the idea that the value of the house would continue to increase, so the homeowner could refinance a year or two down the road.

For example, on a $170,000 loan the minimum payment option may be $500 per month. The homeowner looks at this and feels this is a payment they can afford. What they didn’t understand is that the amount of money owned on the house actually increases by about $500 per month for each month the minimum payment is made. After a year the amount owed on the house is $176,000. After two years it is $182,000. This may be ok if the value of the house is increasing at 5 or 10% a year, but when it is decreasing or staying the same, the amount owed is more than the house is worth.

The lender puts a cap on the amount they will allow to be owed on the home and says you have to start making full payments which are $1125 per month. The payment just went up $725.

Other loans had a very low interest rate for a certain period of time, that adjust sharply upward after a year or two and the payment can increase by a few hundred to a couple thousand dollars.

Homeowners were sold on buying a house at a payment they could afford. The mortgage broker “forgot” to tell them that this wasn’t going to be the payment forever.

Still, others were sold on the no money down idea. Get an 80% first mortgage and a 20% second mortgage. Of course, the first mortgage is at a higher than normal interest rate and the second mortgage is at a VERY high interest rate. “Not to worry” you were told. “The value of the house will increase by 20% in the next couple of years and you can refinance at 80% loan to value and your total payment will go down. You just have to get past the first two years”. Well, the house DID NOT increase by 20%, and some other things happened in your life, so you can’t refinance and you can’t afford the payment. Loan modification could help take care of this problem.

Don’t feel ashamed if you didn’t understand what was going to happen. Most people take out very few mortgages in their lifetime. Some of the in trouble mortgages are so complicated the mortgage brokers could not explain them, and if they could, they avoided telling you about what COULD or WOULD happen.

Loan modification won’t work for everyone, but if you are behind in your payments and don’t look at a modification, or a short sale, foreclosure is the only option left.