When Things Change
They say that the one thing that is constant in life is that it changes. The same is true for owning a home. Things can change over time. Utility costs can increase. The interest rate on your mortgage can change. You need a new roof. Your home’s value can rise – or fall. So what do you do when things change? How do you address the changes so that you can stay in your home? Or what do you do when it’s clear that things have changed enough so that you need to look for another home? This section is designed to help you consider how you’ll respond to change as it affects your role as a homeowner.
What to Do When the Cost of Owning a Home Increases
There are many factors that can cause the cost of owning a home to increase. For example if energy costs increase you will most likely have to pay more to heat or cool your home. Perhaps you have purchased an older home or a home that hasn’t been well-maintained by previous owners and you need to make substantial repairs or improvements. Because homes cost money – and those costs can rise or fall at any time – it’s important to anticipate those changes as much as possible and plan accordingly. One way to do that is to consider creating a separate savings fund for home needs.
Having accumulated some savings can make unexpected changes like higher utility bills or a surprise repair job less financially stressful. Think as well about what other possible sources of income or savings you could access if a home-related expense arose. Possibilities include a loan from friends or family, a home equity loan, etc. Thinking about where you could pull money from can help your absorb the initial cost shock and stay current on your bills. And if you are reading this as a new homeowner, consider putting some additional money aside simply because things happen, and if you’ve got a financial “cushion”, you’ll have more options when things change.
How Interest Rate Changes May Change Your Mortgage
The interest rate is the price that your lender charges for loaning you the money to buy your home. If you have a fixed-rate mortgage your interest rate will not change over time. If, however, you have an adjustable-rate mortgage (ARM) your mortgage amount CAN change over time if overall market conditions change. Most ARMs offer an initial interest rate lower than a fixed-rate mortgage.
That’s why it’s important to know what the ARM’s interest rate cap is – meaning how much could your interest rate increase over time. Every ARM has a limit for how high the interest rate can rise and a cap on how much the interest rate can increase at each “adjustment date” or the date by which each year (or twice a year) your interest rate can change.
For example an ARM that adjusts annually could have a per adjustment cap of 3 percent and a lifetime cap of 5 percent. With some ARMs you are able to convert to a fixed-rate loan (for a fee) at a certain point during the life of the loan.
Interest rates on ARMs are tied to one of three financial indexes which means that if the interest rate for that index changes the interest rate on your loan will be affected. It’s important to know what financial index your loan is tied to:
- Treasury-Indexed ARM – this ARM is tied to 6-month, 1- year or 3 year U.S. Treasury bills or securities. Depending on which index your ARM is tied to, your loan will adjust once every 6 months, year or 3 years.
- CD-Indexed ARM – this ARM is tied to a Certificate of Deposit (CD) index, which can change every 6 months. The per adjustment cap is usually 1 percent and the lifetime cap is typically 6 percent for this type of ARM.
- Cost of Funds-Indexed (COFI) ARM – this ARM is tied to how much it costs a lender to borrow money and can be adjusted (increased or decreased) every month, 6 months or 1 year.
The two other common types of ARM loans are: ARMs with an initial fixed period and at the end of that period (i.e. 1 year, 3 years, 5 years, 7 years), an interest rate that can change every year; and ARMs that adjust only once – usually at either 5 or 7 years – and then after that the mortgage interest rate is fixed.
It’s important to know how an interest rate change would impact your finances. If you are stretching to make your monthly mortgage payment now, would you make it if your interest rate increased—and where would the extra money come from? What could you do to bring in extra income or reduce expenses to absorb the impact of an increase in your monthly mortgage payment? Could you talk with your lender about refinancing to another type of mortgage loan? You need to consider how an interest rate change would impact your finances and create a plan now about how you would adjust, so that you are able to continue to pay the mortgage and stay in your home.
How Your Home’s Value May Rise or Fall
Your home’s value changes over time. Numerous factors can affect your home’s value:
- where your neighborhood is located,
- building occurring near your home that will either positively or negatively impact the desirability of your property to a potential new owner,
- the condition and upkeep of your home and other homes in your area,
- natural disasters such as a tornado or flood,
- the local crime rate,
- the desirability of your school district,
- renovations or additions you have made to your home, etc.
It can be a pleasant surprise to learn that your home increases in value, but be aware that it can also trigger an increase in your property tax. Alternately a decrease in your home’s value can be not only an emotional disappointment but a real financial concern if you want to, or need to, sell your home.
It’s a good idea to give some thought to how a change in your home’s value could affect your finances and your ability to sell and move in the future. You might want to establish a relationship with a good Realtor who can keep you informed as to how home sales are changing in your neighborhood by providing you with a comparative market analysis (CMA). If you are thinking about selling you might also want to get a home inspection done to see what repairs or improvements you might want to, or need to make, in order to get the best resale amount for your home.
What Happens to Your Ability to Stay in Your Home if your Budget Changes?
Maybe your income decreases due to a job loss or reduction in hours. Maybe your expenses increase due to high energy costs or illness. Maybe it’s a combination of both. Changes in your financial situation can have a significant impact on your ability to pay your mortgage. The important thing is to start with your priorities and then figure out financially what has to happen in order to make those priorities work. For example, if your priority is to stay in your current home, determine your total housing-related costs and then compare that to your total current income. Can you make your mortgage if you change your spending habits or do you need to increase your income through part-time work, collecting money owed to you, asking for a raise or looking for a better-paying job, etc. Click here for some encouragement in how to identify what is causing your budget pinch and what you can do to rectify it. Thinking ahead about what you could do to increase your income or reduce your expenses can help alleviate the stress if your budget does change.
And absolutely, contact your mortgage company quickly if you think that you won’t be able to make your full payment on time. Your lender may very well be willing to work out a different payment plan enabling you to stay in your home by staying current on your mortgage.
Learn more about options that may be available to help you remain in your home and get current on your mortgage – or modify your mortgage to make it more affordable – through our Help for Homeowners Mortgage Center.