What If I Can’t Pay My Mortgage?

January 31, 2017

Recently, I received a call from a friend that was laid off a few months ago. She was worried that it was taking longer than she thought to find permanent employment and she was not sure how long her savings would last. She was concerned about not being able to pay her mortgage and was looking for options. My guidance for her was to do the following:

First, contact your mortgage lender ASAP. Even if you are current, contact your lender to let them know you may have a problem in the future. The earlier you contact them, the more likely they are to work with you and the more programs you may be eligible for.

Assess your situation. Most options will involve assessing your current finances to determine your ability to pay your mortgage now and in the future as well as a written reason why you cannot pay your mortgage. Create a budget and assess what you can afford to pay.

Then review your budget for areas where you can cut back. Shelter is essential, so if you are current on your credit cards and late on your mortgage, consider focusing on your mortgage. Ideally, your home expenses (mortgage, HOA dues, etc.)  should not take up more than 25%-35% of your take home income.

In my friend’s case, her situation was temporary and her mortgage was affordable. She had savings and could always do contract work if she could not find a permanent full-time job. If your financial situation is temporary and you will be able to pay your mortgage plus catch up on overdue payments in the future, consider the following options:

  • Forbearance.  A forbearance temporarily reduces or suspends your mortgage payments for a set period of time. Keep in mind that once your forbearance period ends, you are expected to set up a plan to get current on your mortgage, which means paying both your current mortgage and overdue payments.
  • Repayment. If you can make your current mortgage payment but struggle to repay overdue payments, a repayment plan may be an option. A repayment allows you to spread your past due amounts over a period of time.

If your financial situation is long term or you will have difficulty, making payments to get your mortgage current consider the following options if you want to stay in your home:

  • Modifying your loan. Your lender agrees to change the terms of the loan to make the payments affordable. The changes may involve changing the interest rate, the length of the loan, or the payment amount or adding past due amounts to your mortgage principal.
  • Refinancing. If you are current on your mortgage and have equity in your home, you may qualify to refinance your home. You get a new mortgage with interest rates and terms that may lower your payments. Even if you do not have enough equity in your home, you still may qualify for refinancing under the government’s Home Afforable Refinance Program (HARP).

If you if find that even with a modification you may not be able to afford the mortgage payment or you are ready to leave your home consider the following options:

  • Deed-in-Lieu. Also called a mortgage release, a deed-in-lieu is an option where your lender agrees to let you voluntarily transfer the property title to them in exchange for being released from your mortgage obligation. This option can negatively impact your credit score.
  • Short Sale. Sometimes known as a “pre-foreclosure” sale, a short sale is when your lender agrees to let you sell your home for less than your mortgage balance. This option may be a consideration if  you do not  qualify for a refinance or modification and your home is worth less than the mortgage. This option can also negatively impact your credit score.
  • Renting.  Depending on your location, you may be able to rent your home until you are ready to sell or your financial situation has improved enough to where you can afford the payments. Websites like Zillow can give you a gauge as to how much you may be able to get in rental income.

As you can see, there are a lot of options. The most important thing is to keep the lines of communication with your lender open. The earlier you contact them, even if you are current, the more options they may have for you and the more likely they are to work with you.

 

 

Will Refinancing Save You Money?

December 14, 2016

The general rule of thumb is that if you can refinance to a new mortgage rate that is at least 1% lower than your current rate, it’s a good idea. But there are other things to consider in that decision, namely any closing costs associated with completing the refinance. This refinance calculator will tell you exactly how many months it would take you to recoup the closing costs through decreased interest, which is useful for a few reasons.

First, if you’re planning to move in the foreseeable future, you may find that the breakeven date is beyond when you may actually get there. This is what we found when we evaluated a refinance opportunity. Assuming you’re planning to stay in your house indefinitely, then knowing the breakeven date can help you decide how to actually fund those closing costs. If you have the cash in a savings account, it also lets you know how long it will take to rebuild your balance, assuming you take the monthly interest savings and deposit it to your savings.

What if you don’t actually have the cash available? It can be tempting to roll the closing costs into the new loan, but then you’re paying interest on that as well. An alternative strategy could be to use a 0% interest credit card to pay the closing costs (beware of any fees if you have to use it for a cash advance) then use your savings to pay off the card.

Where the breakeven date comes in handy is that it tells you whether or not this strategy will work. If you have a card with a promo rate that runs out in 10 months but your breakeven is 12 months, then it may be a bum deal. You’ll be paying credit card interest for those last two months, so make sure you enter that into your calculation.

Refinancing can be a great way to lower your payment. Try to keep the new loan term as close to your original loan’s term as well. Otherwise, you may have a lower rate and lower payment, but the total interest could still be higher if you spread it out over more years.

Finally, I find that a lot of people avoid finding out what rate they qualify for because they’re concerned that the hard inquiry into their credit will lower their score. It’s true that too many hard inquiries (when a lender actually pulls your credit to evaluate you for a loan) can have a detrimental effect on your credit score, but the character of the inquiry matters too. Applying for a mortgage refinance is unlikely to knock your score down enough to make a difference. What hurts is when you hit the mall and open up multiple store cards to save on your purchase. Take a break from those types of credit applications within six months of applying for any type of loan.

 

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What To Do If You Owe The IRS

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4 Easy Ways to Pay Your Mortgage Off Early

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Is It Time to Refinance Your Mortgage?

March 28, 2012

The chance to refinance a home mortgage loan is rarely missed by a homeowner who is struggling to make his minimum monthly payments on time but this is not always the best option for every homeowner. Being able to refinance a loan doesn’t always give you the bragging rights in your neighborhood. Instead, you should give some thought behind the timing of your decision so that you don’t end up making the wrong decision about your rising mortgage debt level. Remember that multiple refinancings can reduce the overall financial benefit so when you decide to refinance your home loan, you should make sure you make the best decision in order to make it the final one. Don’t be a refinancing junkie as this will hurt your credit score and make you less able to get new lines of credit at an affordable rate. Continue reading “Is It Time to Refinance Your Mortgage?”