Help! My mortgage is adjusting!

Q: My mortgage was fixed for five years and is set to start adjusting in five months. I talked with my mortgage broker and she said that my payment will go up by about 40 percent at that time, which I certainly cannot afford. She ran some comps and told me that I owe $100,000 more on my home than it is currently worth. Her advice was that I should buy another, lower-priced home right now, and then just stop making payments and let the bank foreclose on it. Should I walk away from my home?

A: No. The only thing you should walk away from right now is your mortgage broker.

Mindset Management

I commend you for staying conscious of what's going on with your mortgage and trying to make proactive efforts to handle the upcoming mortgage payment adjustment in advance. Those who wait until the adjustment has already happened end up in desperation and panic -- not a fun place to be.

Owning a home is a very grown-up thing to do, and if you are sufficiently mature to own a home -- either your current one or a future home -- then you are certainly mature enough to deal with the consequences of some less-than-perfect mortgage decision-making. There are many options for proactively dealing with your impending mortgage adjustment short of abandoning your home. It would be a major step in the right direction for your relationship with money and your personal financial and emotional maturity for you to take responsibility for the consequences of your past decisions and pursue those options before throwing in the towel.

There's an old saying to the effect of "the way you do one thing is the way you do everything." I don't think this is always true, because I believe that every one of us can find examples of times when we have made smart or dumb decisions, acted quickly or procrastinated, and been kind or mean. But with that said, in certain areas of our life we tend to act out certain patterns of behavior over and over again. Consider this -- in your personal financial decisions, do you often find yourself backed into a corner and looking for an escape route? Many homeowners who just "walk away" from their homes are simply acting out one more instance of a lifelong cycle of overextending themselves, then bailing out. Consider taking this opportunity to break this cycle, and then harnessing the learning you gain and the momentum you create to become a more educated, savvy and deliberate mortgage and financial decision-maker in the future.

Your mortgage broker's advice was intended to position you against the worst-case scenario. What if you tried to project the best-case scenario and did everything in your power to manifest that outcome? That requires a big mindset shift, but I've seen homeowners do it, and end up keeping their homes or selling them -- both of which are preferable options to walking away.

Need-to-Knows

Foreclosure is definitely your worst-case scenario. Whether you walk away from your house or try to resolve things with your lender, foreclosure will result in not just a smear on your credit report, but a major decrease in your FICO score sufficient to prohibit you from buying another home for several years and to cause your credit-card companies to start closing your accounts. The answer to this is not to simply buy a new home ahead of time; frankly, if you are that overextended, I'm not sure how feasible it is for you to obtain financing on a home right now, and it is a morally bankrupt move to plan so strategically to abandon your obligations under one mortgage and attempt to avoid the consequences of doing so in one fell swoop. You might not have expected to hear this coming from a Realtor/attorney, but it just ain't the right thing to do.

Rather, the ethically, morally and financially responsible move is to put into play a foreclosure-avoidance action plan, and then work that plan. It's a hackneyed turn of phrase now to say that banks really don't want to foreclose on your home. Recent history has shown that banks are institutions, not people, and sometimes move very slowly to assist borrowers seeking to avoid foreclosure even when avoidance is an institutional priority. However, there really are homeowners out there having success avoiding foreclosure, and you should try to join their ranks before just throwing up your hands.

Homes are not disposable. The fact that you currently owe more on your home than it is worth is not sufficient justification for abandoning your home. I know many homeowners who once were upside down, but stayed in their home for another 10 or 20 years, and now that same home is worth three or four times what they paid for it. Take a long-term view on the value of your home, and don't toss it away like you would Enron stock certificates; unlike those shares, your home's value will come back over the long haul.

Action Plan

Here's a step-by-step action plan to take in the event that your mortgage is about to start adjusting.

1. Try to refi. If you are worried about being upside down on your home (i.e., owing more than it's worth), you might need to assess how sustainable this home is for you. If you simply bought way more home than you can ever realistically afford with a reasonable mortgage, you should jump straight to #3 and try to sell your home. If other events, like a temporary loss of income, are making it difficult for you to afford your home now but you think you can afford it over the long haul, work with an ethical mortgage broker to see if it makes sense for you to refinance your mortgage, and whether any affordable mortgage options that are sustainable over the long term are available to you.

2. Loan modification. Call your lender!! Ask for the loss mitigation department; put together the hardship package they request (usually a bunch of your financial paperwork to show that you really can't afford the upcoming adjustment); and then try to negotiate a few months with no payment, a reduction in the balance of your loan based on fair market value, an extension of the low-payment period for several more years, a reduction in interest rate, etc. Lenders vary widely in their amenability to making these sorts of arrangements.

3. Get extreme about increasing your income. If you truly want to keep your home, consider going to extremes. I've seen people avoid foreclosure by renting out rooms, taking second jobs or taking in freelance work on the side.

4. Short sale. If you just bought way more home than you can ever realistically afford, trying to liquidate your home through a short sale is a great option. Work with a Realtor who has experience successfully representing sellers in short sales. I've even seen homeowners have real estate investor friends purchase their home through a short sale, which may give the seller the opportunity to lease and later buy the home back.

Responsibility is the ability to respond, not the ability to run from your problems. The savvy way to respond to your situation is to exhaust the above ethically and financially responsible options before your mortgage adjusts. If you don't, you risk reinforcing a pattern of financial irresponsibility, and ending up in a similar place -- overextended and looking for an escape route -- several years down the road.

Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook," and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online.

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