First Steps Since I Can’t Afford My Mortgage
If you have recently come to the conclusion, “I can’t afford my mortgage,” but you aren’t sure what to do now, here is some good advice from the Federal Trade Commission. The first most important step to getting yourself in a better financial situation is to know what kind of mortgage you have. The options that are available to you will vary depending on the type of mortgage.
Take a look at this explanation of types of mortgages and how to find out what kind you have.
Know Your Mortgage
Do you know what kind of mortgage you have? Do you know whether your payments are going to increase? If you can’t tell by reading the mortgage documents you received at settlement, contact your loan servicer and ask. A loan servicer is responsible for collecting your monthly loan payments and crediting your account.
Here are some examples of types of mortgages:
Hybrid Adjustable Rate Mortgages (ARMs):
Mortgages that have fixed payments for a few years, and then turn into adjustable loans. Some are called 2/28 or 3/27 hybrid ARMs: the first number refers to the years the loan has a fixed rate and the second number refers to the years the loan has an adjustable rate. Others are 5/1 or 3/1 hybrid ARMs: the first number refers to the years the loan has a fixed rate, and the second number refers to how often the rate changes. In a 3/1 hybrid ARM, for example, the interest rate is fixed for three years, then adjusts every year thereafter.
Mortgages that have adjustable rates from the start, which means your payments change over time.
Fixed Rate Mortgages:
Mortgages where the rate is fixed for the life of the loan; the only change in your payment would result from changes in your taxes and insurance if you have an escrow account with your loan servicer.
If you have a hybrid ARM or an ARM and the payments will increase – and you have trouble making the increased payments – find out if you can refinance to a fixed-rate loan. Review your contract first, checking for prepayment penalties. Many ARMs carry prepayment penalties that force borrowers to come up with thousands of dollars if they decide to refinance within the first few years of the loan. If you’re planning to sell soon after your adjustment, refinancing may not be worth the cost. But if you’re planning to stay in your home for a while, a fixed-rate mortgage might be the way to go. Online calculators can help you determine your costs and payments.
– via www.consumer.ftc.gov
Two Good Options
Here are two good options if you can’t afford your mortgage. These ideas may help you take action to work with your lender and get a payment that you can afford, or to take steps so that you no longer have the debt. Once you understand the type of mortgage you have, then contact your lender and begin a discussion so that you can improve your situation before the costs rise.
Photo credit: Jeff Turner via Flickr
Apply for a Loan Modification
A loan modification is when a homeowner works with a lender to change the terms of the mortgage loan. This could mean a temporary or permanent change to the mortgage rate, term and/or monthly payment. This option is similar to refinancing, but it’s only open to those who can prove they’re facing great financial hardship — and who are willing to advocate for themselves to a lender that is probably receiving many other similar requests.
This option is part of the Making Home Affordable Plan, which was designed to help offset some of the dishonest lending practices that left many homeowners in the lurch. However, it may take many months for borrowers to be approved for this program, so it’s hardly a quick fix. Plus, it’s only open to homeowners whose first mortgage originated before January 1, 2009, and whose unpaid balance on the mortgage is not more than $729,750. You can look into whether you qualify here.
Get Rid of Your House
Sometimes the best way to avoid foreclosure is to sell your home. The best way to do this is to list it the traditional way. Unfortunately, falling real estate values have taken that option away from many people whose mortgages are bigger than the market value of the property. If that’s the case for you, there are two key options:
This is when the bank agrees to let a homeowner sell the home for less than they owe on the mortgage. The catch is that, as you can imagine, lenders aren’t thrilled about the idea of taking less than what’s owed to them. It’s up to the lender to decide whether allowing a short sale is in their best interest. This option may not be as damaging to the borrower’s credit as a foreclosure, but that’s only true if the creditor doesn’t report the debt reduction to credit reporting agencies.
Deed in Lieu of Foreclosure:
In some cases, a lender will allow a struggling homeowner to sign their deed over to the bank instead of suffering a foreclosure. In this case, the borrower essentially turns the home over to the lender, who can then sell the home to recoup what they’re owed.
Not that both deed in lieu of foreclosure and short sale can have tax implications. Therefore, homeowners should consult with an HUD-certified housing counselor as well as a tax professional to determine the full implications of this move.
– via GOBankingRates
Do you have a mortgage that you cannot afford?