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Subject:  Re: Financial Planning Advice Date:  9/16/2007  5:29 PM
Author:  aj485 Number:  59215 of 88435

1. We have a home that is currently worth @$650K and our mortgage is $390K. It's an ARM (@7.25% and always climbing these days). The upside of our loan is that we can pay a lower amount in slow months (we're musicians), although we usually pay the full amount.

DANGER! This sounds like an 'Option' ARM - usually you get 4 different payment options - a minimum payment, an interest only payment, a 30 year amortized payment and a 15 year amortized payment.

By paying the 'full amount', which payment are you making? If it's not at either the 30 year or 15 year amortized payment, you are not paying any principal at all on your home.

If, by making the 'lower amount', you are making the minimum payment, you are actually pulling equity out of your home to support your lifestyle.

We also have a home equity loan that we've unfortunately ran up to $80K.

This also sounds like you are using your home equity to support a lifestyle that you cannot sustain on your current income.

I'm wondering if we should consider refinancing and rolling the HELOC into the new mortgage. Any thoughts about this? One of my friends did this CONSTANTLY when the value of his property kept increasing so that he could take out more home equity loans and improve his lifestyle. This behavior can catch up with one, I'm sure. I might need to talk with a debt consolidation expert instead of a mortgage broker.

Yes, this is why people are losing their homes now - they continue to borrow the maximum amount that they can against their homes to support lifestyles that they cannot afford on their income. Then, when the value of the home either flattens out, or worse yet, drops, they cannot borrow any more money, and they cannot afford to meet the obligations they have already committed to, including their mortgage, and end up declaring bankruptcy and/or losing their homes to foreclosure.

I work for a mortgage servicing company, and I am seeing this more and more every day.

2. We haven't done a budget, yet

Until you do a budget and figure out what your actual income vs. expenses are, you should not even consider refinancing your mortgage in order to continue to upgrade your lifestyle (which is what you are doing by lowering your payments - getting more money to spend on other things). You need to understand if you can truly afford your house, or if you are living in a house of cards. Because if you are stealing home equity to support your lifestyle, you need to do some deep thinking on your income and your expenses.

It's great that you love your jobs, and it's great that you love your house and your lifestyle, but if your income cannot support the obligations of your lifestyle, one of them has to give, or there will be drastic financial consequences.

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