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Money Makeover

Tips to lower anxiety as mortgage rates reset

Facing foreclosure, a homeowner looks to buy time

Diane Jones, a middle school teacher, reads papers written by her students. Two years ago, Jones used two mortgages to buy a condominium in Danvers; today, she is struggling to manage rapidly increasing mortgage payments.
Diane Jones, a middle school teacher, reads papers written by her students. Two years ago, Jones used two mortgages to buy a condominium in Danvers; today, she is struggling to manage rapidly increasing mortgage payments. (Jodi Hilton Photo for The Boston Globe)

Sometimes there are no easy answers. Just ask Diane Jones, a middle school history teacher who two years ago bought her Danvers apartment when it was turned into a condominium.

It seemed like a good idea. The housing market was still rising, her landlord helped put together her financing, and Jones didn't want to move. "I wanted to stay in town so that my son could finish high school," she said.

Today, Jones, 55, shakes her head when asked how those good intentions went awry. "I trusted people," she said, explaining that she didn't shop around for a mortgage, didn't read all of the mortgage documents, and didn't understand how bad things could get. But as her adjustable-rate mortgage approached reset in June - eventually boosting her monthly payments by more than $450 to nearly $2,000 - she knew she was in trouble and might even lose her home.

Jones, who applied for a Globe Money Makeover to get advice on what to do, is one of thousands of Massachusetts homeowners whose adjustable-rate mortgages will reset this year after a booming housing market and low interest rates lured many into buying. Adjustable-rate mortgages, or ARMs, typically reset after two, three, or five years at rates that can substantially increase homeowners' monthly payments.

These adjustments have been particularly painful to subprime mortgage holders who had to stretch to meet their initial payments and took multiple mortgages to make the numbers work. Homeowners unable to afford their new mortgage payments have contributed to the record number of foreclosure filings in Massachusetts and elsewhere in the country.

To pay for her $228,000 condo, for ex ample, Jones, a single mother, took two mortgages. The first, with an initial interest rate of 6.99 percent, charged interest only for the first two years. After 24 months, Jones not only started repaying principal but found her rate jumping to 9.99 percent. That resulted in a 43 percent increase in those monthly payments, which jumped to $1,520 from $1,063 - an amount that exceeded what she had previously paid for both mortgages.

Worse, a provision in the mortgage allows rate changes of up to one percentage point every six months to a maximum rate of 12.99 percent.

The second loan is a fixed-rate 11.25 percent mortgage with monthly payments of $443 that comes due with a lump-sum payment in 2020.

Even before the reset, Jones found herself juggling mortgage payments, college loan payments for her son, credit card debt, and day-to-day living expenses. Knowing that the reset was coming, she decided she needed professional help. She applied for a Money Makeover, saying "I feel that I will be crashing and burning soon."

By the time she sat down for her makeover with Karen Busanovich, a certified financial planner in Woburn, Jones had already seen a debt consolidator to work out her credit card debt. Delays in the consolidation process, however, damaged her credit rating, which dropped to the 400s from the 600s. Scores under 600 are considered high risk.

When she contacted various refinancing programs, Jones found her credit was no longer good enough to qualify. Her lender wasn't interested in negotiating because she had been managing to scrape together her monthly payments. One possibility, she thought, might be more financial aid for her son, a junior at Emmanuel College. But when she met with Busanovich, she found that getting more financial aid wasn't the answer. Emmanuel, it turned out, was already bending over backward for the Jones family, Busanovich told her.

So Busanovich reviewed Jones's numbers to help her develop a plan of action. The picture wasn't pretty. A quick review of income and expenses showed that Jones was spending about $1,000 a month more than she was bringing in. Even if Jones trimmed her bare-bones budget by dumping the cable TV at $66 a month, she would still be in the red.

Jones was faced with unpleasant choices. Busanovich said she could get a second job, sell the condo, or get the lender to renegotiate. Or she could let the lender foreclose. "At some point, you have to decide if you really want to be a homeowner," Busanovich said.

Unwilling to consider foreclosure and unsure about the other options, Jones went back to her lender, saying she simply couldn't pay. After sending in the financial numbers pulled together by Busanovich, Jones got the lender to agree to a loan modification that gave her an additional two years of interest-only payments at the 6.99 percent rate.

Under the new terms, the original subprime reset conditions will return in two years. "But this is probably the best she can do without going into foreclosure," Busanovich said.

Jones is hoping these revised terms will give her a chance. For one thing, the two-year window might allow Jones to repair her credit history, making her eligible for government-backed refinancing or other loan programs.

"She has to make all her payments on time, not a day late," said Busanovich, noting that such diligence can have a big impact. The planner also recommended that Jones make payments against her 11.25 percent loan whenever possible.

"That way she can get some equity in the condo," she said. A second job or at least summer job might help here.

Jones said she might also be able to increase her income by retiring, taking her retirement benefits - 80 percent of her salary -and getting a different fulltime job.

Jones admits she isn't making any headway in paying down her mortgage, but she is breathing easier. She's now got 24 months - instead of a few weeks - to come up with some answers.

APPLY FOR A MAKEOVER To be considered for a Money Makeover, fill out the application at the "Your Money" section of boston.com/business, or call 617-929-2916.

 
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