7 Solutions for Homeowners Struggling with their Mortgage

If you are now struggling to make your mortgage payments, you’re not alone.

Whether your trouble meeting your mortgage payments is coronavirus-related or not, the first thing to do is to call your loan provider. If you can, try doing this before missing payments, as this will keep the largest number of options available to you. Here, experts lay out different options for when you’re struggling to pay on time.

Solution #1: Request Mortgage Forbearance

Essentially, by reaching out to your lender they may be providing mortgage forbearance to borrowers financially affected by the novel coronavirus for up to 12 months. That means that individuals can reduce or suspend their payments for that time. After the forbearance is over, lenders will work with borrowers to modify loans to lower monthly payments as necessary.

Solution #2: Refinance to a Longer-Term Loan

Spacing your loan out over a longer period is one option that can reduce your monthly payment amount. Refinancing to a longer-term loan is the simplest way to reduce monthly mortgage payments, especially when cash flow is a problem.

However, it’s important to note that your interest rate will increase. To offset this, experts recommend making higher payments to increase the speed at which you pay down the principal. The majority of mortgages have no prepayment penalty (though you should definitely check yours).

Solution #3: Refinance to Change Your Interest Rate Terms

Refinancing to an adjustable rate mortgage (ARM) is a viable option if you’ve almost finished paying off your mortgage. “More and more consumers recognize the financial benefits an adjustable rate mortgage can provide under the right circumstances.” A perfect example is a homeowner who anticipates selling their home in the next three years and currently has a $400,000 fixed rate loan at 4.25% paying $1,976.76 per month.

If the homeowner refinanced to a hybrid adjustable rate mortgage fixed for five years at 2.875%, this would reduce the monthly payment to $1,695.57 per month and save $281.19 per month.   

If a home is nearly paid off, the vast majority of the monthly payments are going to equity and not interest. Refinancing to an ARM might solve short-term cash flow issues by reducing the monthly payment at the expense of subsequent payments. That being said, if interest rates start increasing, the monthly payments may increase over a period. 

Alternatively, if you have an ARM, switching to a fixed rate mortgage may not lower your current monthly payments, but it can stop your payments from growing. “This makes sense if current fixed rates are lower than the ARM interest rate, or if you expect to move later than the next three years.” However, if you’ve been in an ARM for a while, the fixed rate you refinance into may be higher than your existing rate and this can cause your monthly payment to go up.

Solution #4: Challenge Property Taxes

If the value of your home has dropped, challenging your property tax may provide some financial relief. “You’ll need to contact your city tax assessor’s office where your house is located to see what type of information they will need as proof that the housing values have dropped.”

This would be a short-term strategy. As property values increase, property taxes will rise. Also, be advised that it may cost several hundred dollars to have your home appraised. 

Solution #5: Modify the Loan

loan modification is an alternative for those who cannot refinance their loan but need to lower their monthly house payment. But, unlike a refinance, it requires a hardship. Borrowers must show the lender that as a result of a financial hardship, they are not able to continue making the regular monthly house payment. This process involves extensive paperwork that must be completed and sent to the lender for review.

Solution #6: Get a Home Equity Loan

Getting a home equity loan may provide immediate assistance to struggling homeowners, but this strategy only works if you have a lot of equity in your house, which means that your home is valued at much more than you owe on it. Struggling homeowners should consider paying off a mortgage with a home equity line. “Banks usually cover all closing costs on home equity lines. The savings in closing costs can be used to pay off the principal balance quicker.

This strategy is highly effective for borrowers who have the self-discipline to pay more than what is owed each month, since the minimum payment is usually just the interest that has accrued during the month.

Solution #7: Get the Lender to Eliminate Private Mortgage Insurance

Depending on how much equity is in your home, eliminating the private mortgage insurance (PMI) can lower your mortgage payments. If you have at least 20% equity in the property, highly recommend contacting the lender about dropping the mortgage insurance. Borrowers who usually don’t pay 20% down are required to have PMI for at least two years, but there may be exceptions to the two-year rule. For example, if the homeowner made improvements to the house that increased the value, the requirement may be waived.

The Bottom Line

If you’re struggling with your mortgage, don’t throw in the towel. There are various solutions that can help you stay in your home and manage your monthly mortgage payments. 

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