5 Things You Should Do Right Now if you have a mortgage

With all of the subprime guideline changes and prime mortgage rates at a low point, here are 5 Things You Should do Right Now(TM) if you have a mortgage:

1. Figure out what type of loan you have:

Do you have an adjustable rate mortgage (ARM), interest-only loan, pay-option (negative amortization) or second mortgage?
If you have an ARM when does the rate adjust (most ARMs are either 2,3,5 years after you got the loan) and what will it adjust to? You can take a look at the index (it’s in the note and usually called the LIBOR or MTA) online from a variety of sources. This will give you an idea of what your rate will jump to when it adjusts. Verify what it will do to your monthly payment by using an online mortgage calculator.
If you have one of these types of mortgages read the loan documents to get familiar with your obligations under the loan. It is tedious, but well worth it to ensure your understanding. If it concerns you talk to someone to trust to explore your options.

2. Find out if you have a pre-payment penalty on your loan. This will let you know how much longer you’ll be locked in to your loan and will provide you a better picture of what options are available to you. There are very few circumstances where paying a pre-payment penalty makes sense (though I believe that there are some), and this will let you know what time frame you should be looking at for refinancing, especially if your loan falls in to one of the categories in #1.

3. Get a copy of your credit report for free. And don’t get it from one of those free, but not really free, sites. The credit bureaus – by law – have to give you a copy of your report once a year absolutely free. Cleaning up your credit and making sure the bureaus have accurate information is a whole series of articles on its own, but as they say "knowing is half the battle". Once you know your credit score you’ll have a much better grasp of what your options are if you choose to refinance.

4. Figure out how much of your monthly income is dedicated to (1) your mortgage payment and (2) all of your bills including your mortgage payment. For example if you make $5,000/month and your mortgage payment is $1,000 and you have another $1,000 in bills your 2nd ratio (2) is 40% ($2,000/$5,000). If number two (2) is more than 50% you’re exposed to problems if your mortgage payment adjusts to a higher rate. In fact, if it is near 50% you’re going to feel significant pain if your mortgage readjusts.

5. Figure out the worst case scenario for your mortgage payment. Using the mortgage calculator above figure out how much you may have to pay if you are unable to refinance your mortgage and it adjusts to a higher rate. Once you are aware of what your new payment will be, look at #4 again with the new numbers. Add up all of your expenses with the new mortgage payment and see where you net out each month. If that number scares you, talk to someone you trust about your options in keeping that from happening.

Even if your mortgage is fixed for more than a year or two, it still behooves you to plan and prepare accordingly. If you have a sound plan regarding the management of your mortgage you’ll be much better prepared to manage your debt better and won’t be caught off guard by any changes in your mortgage payment. Everything works better with planning and your mortgage is no different.