If mortgage trouble arises

Even when you’ve planned carefully for the costs associated with owning and maintaining your home, other challenges may arise which can make paying your mortgage very difficult.

Financial hardships

Financial hardships can strike almost anyone. Even if you’ve planned carefully, it is possible that any one of the following can put a strain on your budget:

• Large or unexpected medical expenses
• A job loss or job change
• An interruption in employment — for example, a temporary layoff or reduced hours
• Other changes in family circumstances, including death of a wage earner, divorce, or other events

Whether the hardship is temporary or permanent, circumstances like these cause homeowners to struggle, emotionally and financially, which may place a strain on keeping current with mortgage payments.

Adjustable mortgages

Even if you’re healthy and have a job, making your payments on time may become difficult if you have an adjustable rate mortgage (ARM). Unlike a fixed-rate mortgage, where the monthly payment remains the same for the life of the loan, the interest rate on an ARM is periodically adjusted throughout its term.

Many ARMs begin by charging a very low interest rate — sometimes called an introductory rate. But that rate may adjust upwards quickly, requiring higher payments that may put stress on some borrowers’ finances.

The rate you pay may also increase annually or more frequently after that initial adjustment — though there are usually annual and lifetime caps that limit the amount of each increase. Part of your planning should focus on when your payment could change and how much higher it could be.

Ideally, you asked your lender before you agreed to your loan to tell you the maximum payments you could be responsible for in the worst-case scenario. But if you didn’t ask then, it’s not too late. A responsible lender will have no problem helping you understand your maximum potential payment so you can plan for the future.

Non-traditional loans

You may face greater challenges if your mortgage is a non-traditional loan product, such as an option ARM. These mortgages offer flexible monthly payment options, but paying only a small minimum amount may mean that you’re not covering either the entire principal or even the interest that’s due. This may increase your payments even if you make a payment every month and you’re not technically behind on your mortgage. That’s because your interest rate may be reset to include the unpaid amounts, suddenly requiring a much higher monthly minimum payment.

Other types of non-traditional mortgages also involve unique risks with the potential for sudden rate increases. For example, with an interest-only mortgage, you begin with an introductory period — often five to seven years — where your payments cover only the interest portion of what you owe your lender. When the introductory period ends, your payments increase to cover the unpaid balance of your loan principal. You need to plan ahead for these larger payments. They may be difficult to manage if you were stretching to afford the interest-only payments during the initial period.

In other words, some nontraditional mortgage loans may benefit you in the short term, but you’ll have to plan carefully and anticipate the amounts that your payments could increase over the long term.