Escaping from an option ARM (Page 1 of 2)

MONEY MAKEOVER

Option ARM blues

This family faces a dilemma millions understand. Their option ARM started off great but is now zapping their bottom line.

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Understanding mortgages

Profile: The Flemings

The problem:

Used an option ARM to buy their home; mortgage now larger than when they bought house.

The plan:

Organize spending and savings so the option ARM can be refinanced to a fixed-rate mortgage.

Follow up:

Able to increase savings while refinancing to a low-interest, fixed-rate mortgage.

The plan in 6 steps

Get on a budget.

Track every dollar that comes in and goes out.

Cut miscellaneous spending to a maximum of $500 per month.

Tip: Use this work sheet for creating a budget

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The plan

Put home renovations on hold
Between the original mortgage and the subsequent home improvement project, Phil and Stacey have taken a big bite with this house. As a result, making more than the minimum payments on the mortgage is tough to swallow. But starting now – no more shortcuts!

How do they manage this?

Start by postponing further home renovations. In addition to needing to ramp up mortgage payments in a big way, there are other more pressing needs such as the need to establish some savings cushion, and another $1,500 in tuition payments for Phil is coming due.

Keys to success

		Track every dollar that comes in and goes out.

		Establish a savings cushion.

		Build equity by chipping away at the mortgage balance every month.

		Start saving for retirement.

		Adjust your taxes annually as needed.

		Maintain sufficient insurance coverage.