Frugal Facts: What to Do When Your Mortgage Increases

Unless you have an adjustable rate mortgage, it's likely your mortgage will increase because taxes and insurance rates increase. You sign those final papers and think you've maxed out the amount you can pay what do you do?

As with everything in life, you'll have to learn to adapt. Generally, it means a change in your disposable income. The important point to remember is that a change in your disposable income doesn't mean a change in your lifestyle regarding anything that matters.

A mortgage adjustment rarely means a decrease in payments, so you'll be looking at spending more money to live in your home and having less money to spend on other things. It can be done. It will hurt a bit in the beginning, but that's the point of an adjustment. You'll hit a point where the new payment becomes normal and you find yourself living life just as you always have.

Before the Rate Increase

Assume You'll Have a Rate Adjustment. A good way to adjust to a change in a mortgage payment is to assume that it will happen. As soon as you take on a mortgage, it will hurt, just like the inevitable adjustment. Once you work it into your budget and get used to paying that amount, try to pay more against your mortgage. A good rule of thumb is to figure out what the principal payment is each month and add an extra principal payment. You'll cut the interest you pay on your home virtually in half.

If you have an exceptionally low mortgage interest rate, and you have credit card debt with a high interest rate, play a little mind game with your own money. Set aside the money you would have paid against the principal of your mortgage, then use it to pay off a high-interest credit card.

When you have done that, use anything you've set aside to pay an extra principal to build a reserve account of emergency money. This is all on the premise that one day you will have a change in your mortgage or income and you may not have the time to adjust. If you've paid off high-interest debt and set aside money in an emergency fund, you won't be surprised by any adjustment in your mortgage payment.

The idea is from the moment you take on the mortgage payment, you will always be anticipating an increase in payment or a change in your financial situation that could range from job loss to a loss of income from one earner if you decide to have children and leave the workforce.

Once you have paid off the high-interest credit cards and built an emergency cushion, resume paying that extra principal amount directly against your mortgage to pay your loan down faster.

As time goes in, the mortgage payment will most likely start to grow, but you won't be surprised. If you go into a mortgage arrangement with the idea that you will have to pay more, and you generally will, you won't be shell-shocked. So, when the increase happens due to the mortgage itself, increased taxes or insurance costs, you can use the overpayment you've been putting aside from the start to adjust to a new payment.

Keep Your Lifestyle the Same

As you get salary increases, monetary gifts, freelance income or the like, don't change your lifestyle dramatically. Instead put it towards your mortgage, again paying extra towards the principal. You won't go wrong anticipating an increase.

If for some reason your mortgage adjustment means you payment is lower, treat the new-found money as if you received a pay raise. It's extra money you didn't know you had. Use it to pay against the principal on your mortgage each month, and you'll own your home faster and without feeling the financial pinch.

If you haven't started this program and you are faced with a sudden surge in your mortgage payment, it's time to take a look at your budget. This will hurt at first, but you will adapt. Keep telling yourself that your home is your most important asset. Even if it's tough to make the payment, given how difficult it is to sell homes nowadays, it makes sense to do whatever needs to be done to make the new mortgage payment.

Look at your budget to find out where you've been letting money slip away. Normally the mortgage increase is not major, so it's a matter of cutting back on some frills or taking on a freelance job here and there.

Entertainment. Once you got comfortable paying your mortgage, did you sign up for premium cable stations, for example? Are you renting movies as well? There's an obvious place to cut expenses.

Look at your banking fees. Some banks charge money for keeping your account open if it falls below a certain monetary level. If yours does, shop around for another bank and save yourself $20 bucks a month at least. If you're paying for checks, consider setting up an online account. You'll save on checks as well as postage.

Dining out. If you have a family of four, eating out takes its financial toll, even if you're going for fast food. Cut a trip or two out, and put it towards your new mortgage payment.

Pets. If you get your pet groomed, start giving Fido a bath at home and take a shot at grooming him yourself. Every little bit counts. Get the family involved and it's not so painful. Combine a hose, soap and children and it's a virtual party. The extra money you save will make a dent in your new payment.

Eventually all of these changes will become part of your lifestyle. So, it's not a crushing difference in lifestyle, just an adjustment that can be made bit by bit.

In the very odd case that your mortgage payment decreases, and you have to make an adjustment to paying less, still follow the rules above. Add an extra principal payment or pay off high-interest debt with the savings. Don't treat it as found "fun" money. Odds are it won't be enough to change your lifestyle dramatically in the short term, but if you put it towards paying down a mortgage payment, it will pay high dividends in the long run.