Those With Exotic Loans Have Reason to Worry, But Can Still Stave Off Disaster

If you used an interest-only or a so-called option mortgage to stretch into an otherwise unaffordable house in the last year or two, be afraid.

Be very afraid.

You were eager to get approved by any means necessary, and now you’re going to pay the price. These creative home loans are designed to help people get into houses with the smallest amount of initial cash flow. They are aimed at keeping the housing market booming through a wave of interest-rate increases that were threatening to disqualify some buyers and borrowers.

But now those buyers could have worse problems than originally missing out on their dream homes. As Florida mortgage rates continue to rise and these creative mortgages move past their introductory levels, monthly payments are moving up fast. In many cases, faster than the value of the home and the owner’s ability to keep up.

“These nontraditional mortgages are going to create a lot of human misery in the next several years,” says Stephen Brobeck, executive director of the Consumer Federation of America.

It wouldn’t be the first time.

In the late 1980s and early 1990s, housing markets as diverse as Houston and Boston saw people trapped in houses they couldn’t afford to keep living in — or to sell. Some owners simply took a walk from houses and mortgage obligations, alike, losing property and good credit in doing so. Now, in 2006, cumulative U.S. mortgage debt has reached record highs.

In 2005, foreclosures were up 25 percent from 2004. This year, they’re already on pace for almost double the 2005 totals, according to RealtyTrac.

That’s cause for concern at the National Foundation for Credit Counseling, whose president, Susan Keating, said she sees the $2 trillion in adjustable rate mortgages written in the last two years as a burgeoning crisis.

“Consumers are over-extended with their mortgages, and many homes will be at-risk with rising interest rates,” she said, “Many consumers signed up for products they simply did not understand.”

Don’t panic just yet. If you’re one of those consumers, think about the next step, and, consider these steps to ward off a worst-case scenario.

– Stockpile money. The first thing to do is save as much as you possibly can. If you have a rainy day fund, use it to keep up payments if they start to move higher. If you don’t have such a fund, start one. Do that even if it means renting out a room of your house, taking another job, having a garage sale, skipping a vacation, anything. If your payments stretch your monthly budget now, and you don’t have savings, you are very vulnerable.

– Florida home loan refinancing. If you got into one of those exotic, non-traditional mortgages in the first place because of bad credit, the period in which you’ve been making payments on your home loan could raise your score, which could in turn qualify you for a better mortgage.

– Make your payments, no matter what. In terms of future ability to maintain credit and borrow money, and your ability to hold on to your house (not to mention peace of mind), this is absolutely vital. Even if you pay the minimum balance on your credit cards, cancel the cable and hold the car repairs off for another month. Desperate times call for desperate measures.

– Get consumer credit counseling. The experts are here for just these situations, to solve your debt problems. Look for someone who has specific experience with housing issues.

– Consider moving. Be honest with yourself about your budget, and if you really can’t afford to stay in your house, sell it and move on. Don’t think of it as giving up a dream, think of it as getting out of a bad financial deal while the market is manageable. Downsize. Learn from the experience, apply for a new Florida home loan and think about moving up to your dream house some other year, when you can manage payments better.