If you're in over your head in debt, you're not alone. High unemployment, a lackluster housing market, and sky-high energy costs have combined to make loan payments unmanageable for many Americans. Luckily, help is available for those willing to face reality. Gather your statements and your phone, and remember: every dollar counts.
Making Home Affordable: HARP
Your mortgage loan obligation is the single most important debt to pay. However, dwindling equity has made it difficult for many to refinance into the historically low rates offered in 2011. The federal government has stepped into the game by offering the Making Home Affordable plan for homeowners who have mortgage loans backed by the FHA.
In HARP (Home Affordable Refinance Program), homeowners who have first mortgages that don't exceed 125 percent of the home's current value are eligible. Homeowners may not cash out to pay other debts. Those with second liens may be eligible as well.
Making Home Affordable: HAMP
Homeowners who are behind or about to fall behind may benefit from participating in HAMP, the mortgage modification program. Payments are reduced to 31 percent of gross monthly income, which is achieved through an interest rate reduction, term extension, or principal forbearance (principal reductions are rare). Loans do not have to be FHA-backed. A trial period will be offered to borrowers, and if timely payments are made, the modification is made permanent.
Unfortunately, HAMP has been beset by problems. Lenders have been overwhelmed by modification requests and seem unwilling to change deal terms; the Obama Administration has admitted that it would like to see more homeowners helped by HAMP.
Nevertheless, if you qualify, it's worth pursuing. Consider hiring a real estate attorney or professional negotiator to handle your case. Have your paperwork, fax and email ready at all times. Be patient; modification requests routinely take months to complete.
The National Foundation for Credit Counseling
Thankfully, credit counseling and debt management services run more smoothly. The National Foundation for Credit Counseling operates the country's finest debt education organization; it's also the oldest. The NFCC's debt management plans are a terrific legitimate way to eliminate your debts.
In a DMP, your unsecured credit lines are closed and the outstanding debts will be paid in full in less than 5 years. DMPs are not loans; consumers make monthly payments which the NFCC distributes. Interest rates and often monthly payments are lowered and accounts are made current.
Contact the NFCC directly for more information; the DMP begins with a free budget consultation that can be completed online or over the phone. Fees for services vary by state, but are minimal, often less than $50 (and sometimes free).
Alternatives
Jumbo mortgage borrowers may find less options at their disposal. Contact your lender directly; the federal loan program does not work for these loans. You may need to consider a short sale, in which the lender accepts the proceeds from the home's sale even though it's less than the mortgage balance.
For unsecured debts, a settlement option may work. In debt settlement, a fraction of the outstanding balance is paid. The account must be delinquent. Your credit will take a significant hit, although if you're already late, it's bad anyway. The best deals are made when the borrower is able to make a lump sum settlement, although you may be able to pay the balance due over time.
You can also try a home debt-payoff method. Theories abound as to which is most effective, but the best way is to pay your highest-interest debt first. Put as much as you can toward this debt, while paying the minimums on the others. When that debt is paid, put that payment toward your next-highest interest rate bill, and so on until your debts are paid in full.
Don't give up. There are many roads to debt freedom, and they're all rocky. Ultimately, it's worth the effort.
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