How to cope with the mortgage: Know your options

The writers of this thing called life were doing okay all long. But it seems someone handed the scriptwriting to the wrong guy, and he sure messed up.  Now it’s a struggle to beat the pandemic all while trying to stay afloat. It’s no wonder you might be trying to figure out if there is a way to reduce your mortgage payments. I will help you on how to cope with the mortgage: Know your options

Well, there are a few options available to take a break or lower your monthly payment for a while. Continue reading to find out more.

Option 1: Mortgage Refinancing

Investopedia says refinancing means paying off an existing loan and replacing it with a new one. Simply put, it’s like trading in your mortgage for a new one.

Refinancing can lower your interest rates, so you pay less each month. On top of that, you can free up some money to use for other things.

 After the government lowered interest rates to deal with covid, mortgage refinancing is on the rise. 

But, it doesn’t always work for everyone. You have to ask yourself a couple of questions to see if you qualify.

Do I meet the lenders’ loan approval standards?

You need to qualify for a new mortgage. So if you’ve lost your job and have no other income source, it might be difficult to secure a mortgage refinancing loan.

 Lenders want to give new loans to people who still have healthy sources of income. You will have to prove that you’re employed and have enough earning potential to cover the loan repayments. They’ll ask for lots of documents like bank statements and IRS returns.

Are the closing costs worth it?

Because it’s still a mortgage, you still have to meet most of the closing costs. They will be exactly the same as the first time, like title insurance and origination fees. If you can’t recoup the cost within a reasonable time (about five years), you might make a loss.

Also, if you are not planning to stay in the same house for a while, you might end up losing more.

You need to add up the figures and see if this works for you. So you’ll need to figure out the cost of your initial mortgage and factor in the down payment and the time left to pay off the mortgage. Then you have to calculate the cost of the new mortgage and factor in the new rate.

Head spinning already? 

Getting the math right is a job and a half. To get it right ( without driving yourself crazy) use a mortgage refinance calculator. Mortgage calculator.info has a pretty easy to use one. Simply input the old and new mortgage info. Like this:

The Old

The New

The Outcome

 

If you’re Mr. Doe here, you will save $665.34 every month from refinancing. The total savings of $16 700, covers the $5200 closing costs; it’s not a bad move. 

Here’s a couple of tips to help with your refinancing

Talk to different lenders 

When you’re ready to refinance your home, it’s wise to talk to many lenders. They’ll give you different loan estimates until you get the best offer. Lenders are dealing with lots of calls, so you’ll have to be patient. You can use the mortgage calculator to find the rates offered by different lenders and estimate your savings while you wait.

Home evaluation

Part of the process will involve a home evaluation to see if your house is worth as much. Be prepared for that. 

Can I refinance my mortgage more than once?

It’s not against the law. However, you need to have sufficient equity and pay the closing costs each time. So it’s not practical. That said if your only other option is foreclosure- refinancing again looks good.

Option 2: Mortgage Deferment

Deferment is putting your payments (and interest) on hold for a while ( usually one year). It gives you the option to pick up where you left off- no penalties- when it’s over. 

You get some breathing space and avoid foreclosure when you’ve hit a hard spot. Talk to your lender and get an agreement first before you pause payment.

Will it affect your credit score?

If it’s approved by the lender, it won’t affect your score. Provided you resume payments when you should.

Option 3: Mortgage Forbearance

Here you get the option to talk to your lender and agree to stop payments for a while just like when you defer. But with this option, you have to work out payment terms to see how you’ll pay back after forbearance. You can’t continue as if nothing happened. 

How you eventually pay back depends on whose backing your loan. If you’ve got a government-backed mortgage (think Fannie Mae, Freddie Mac), your loan falls under the CARES act, they’ll allow you to choose the following options after forbearance. 

  • Pay monthly amounts ( with some extra) until you finish the payment.
  • Pay what you owe in one go. ( In terms of the CARES act, they can’t make you pay one lump sum like this for government-backed mortgages.
  • Modify your mortgage loan to lower your payments- no penalties, no refinance

Will this hurt your credit?

No, it shouldn’t. If you handled your forbearance the right way, it wouldn’t come on on your report. That said it’s important that you ask your lender or check to find out if your loan is government-backed. If it’s private backed, the rules don’t apply in the same way. 

Refinancing, forbearance, or deferment, which ones better?

Not every solution works the same for everyone. The best one for you will depend on your circumstances. 

Have you been furloughed?  Have you filed for unemployment? Do you have any other income sources? Can you work in other industries?

You see, there are a million and one questions you have to ask yourself. 

To summarise, refinancing is a good option if you can still meet your payments. However, if you’re stuck right now forbearance or deferment may be better. Bearing in mind that neither option is a magic wand, you still have to make those payments. 

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