Adjustable mortgage may not be affordable for long

Dear Liz: Our mortgage balance is $202,000. Zillow.com says our house is valued at $162,000. The current interest rate on our adjustable-rate mortgage is 10.75% and our credit scores are in the mid-600s. We can’t refinance because of the negative equity. We have never been late and make enough to cover all the bills, but that leaves us with nothing extra. We would love to sell and rent for a couple years or refinance, but there is not one ounce of help out there for us that I can find. I did contact the bank, asking for a lower fixed rate. They said no since our mortgage payment is a tad less then 31% of our income.

Answer: A payment that’s 30% of your income isn’t ideal, but it’s not what’s causing your financial problems. Most likely overspending in other areas such as a too-expensive car loan or credit card debt is where the problem lies.

But you do face a significant risk of your payment rising to unaffordable levels when interest rates finally start marching up again.

Your first step should be contacting a HUD-approved housing counselor to discuss your options, including the new enhancements to the federal Making Home Affordable Program. You can get a referral at http://www.hud.gov. (Many housing counselors work at credit counseling agencies that can also help you work out your budget issues.)

If you can’t get a loan modification or refinance, you can consider a short sale, in which, with the lender’s approval, you sell your house for less than what’s owed and the lender accepts the proceeds as settlement of your loan. Short sales will hurt your credit, but you’ll be able to buy another home sooner than if you simply walk away or let your home go into foreclosure.