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Housing Counsel

Late Payments Don't Always Spell Doom for Homeowners

By Benny L. Kass
Saturday, April 16, 2005; Page F05

We made a big mistake three years ago and now we are in potential trouble. We took out an interest-only mortgage loan and put down 5 percent of the purchase price. I just lost my job and cannot afford the high monthly payments. We have considerable equity in our house, but we have started to receive threatening letters from our mortgage lender. What should we do?

You may or may not have made a big mistake by obtaining an interest-only loan. Yes, your principal balance remains the same; what you borrowed three years ago is what you owe today. However, would you have been able to purchase the house without that loan?

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Even though you have lost your job and are in financial trouble, in some ways you have been fortunate. Over these past three years, home values have appreciated at an unbelievable pace. At least, if must sell, you will have some money in your pocket.

However, if and when home prices start to depreciate, an interest-only loan can be a disaster.

It may not be a consolation to you, but you are not alone. Recently, a Web site devoted to foreclosures, www.foreclosures.com, reported that 28,190 newly foreclosed residential properties were listed for sale in the United States in March. According to the report, this was an increase of 50 percent over the previous month.

There are a number of steps you should take when you start to get behind on your mortgage payments.

If you want the lender to cooperate with you, you have to cooperate, too. That means talking with the lender as soon as problems come up. According to Freddie Mac's guidelines on alternatives to foreclosure, the secondary mortgage market gives a mortgage lender broad discretion to extend relief, "to a borrower who encounters hardship, is cooperative and has proper regard for fulfilling obligations."

The first possible relief is referred to as temporary indulgence. Here, the lender, on request, may grant the borrower a short time -- usually not more than three months -- to cure any delinquency. However, it would be only temporary relief, and by the end of that time, the borrower must be current.

Another approach is a repayment plan. Here, the borrower is given a fixed period, usually not to exceed one year, in which to bring the mortgage current by immediately making and continuing to make payments in excess of the monthly mortgage payment.

It is important to get this repayment plan in writing, signed by both the lender and the borrower.

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