- Solution # 1: Refinance to a longer-term loan
- Solution 2: Refinance to an ARM
- Solution # 3: Refinance from an ARM to a fixed rate mortgage
- Solution 4: Real estate transfer tax
- Solution 5: Change the loan
- Solution # 6: Get a Home Equity Loan
- Solution #7: Get the lender to eliminate private mortgage insurance
- The Bottom Line
If you qualify to buy your home but are now struggling to make your mortgage payments, you're not alone. According to RealtyTrak, 1 in 1, 210 homes are in foreclosure, and in some states that number is much higher. In New Jersey, it's one in 451 homes; In Nevada, it's one in 555 homes. You may feel that you are also well on your way to becoming another foreclosure statistic. But do not give up yet. You may be able to reduce your mortgage problems by reducing your monthly mortgage payments. Every situation is different, so Investopedia spoke with several mortgage experts to come up with seven different options.
Solution #1: Refinance to a longer-term loan
Spreading your loan over a longer period of time is an option that can reduce your monthly payment amount. Refinancing to a longer-term loan is the easiest way to reduce monthly mortgage payments – especially if cash flow is a problem, says Al Hensling, president of United American Mortgage in Irvine, Calif.
However, it is important to note that your interest rate will increase. To compensate, Matt Hackett, underwriting and operations manager at New York-based Equity Now, says most mortgages don't have a prepayment penalty: "If your financial situation improves, I recommend making higher payments to speed up. That you pay the client, " says Hackett.
He also advises homeowners to make sure prepayments are made without penalty and suggests they determine the difference between their current rate and the new rate on the longer-term loan to see if it makes sense.
Solution 2: Refinancing to one ARM
Refinancing to an adjustable rate mortgage (ARM) is a viable option if you have almost paid off your mortgage in full. "More and more consumers are realizing the financial benefits of an adjustable rate mortgage under the right circumstances," Hensling says. A perfect example is a homeowner who expects to sell their home in the following three years and currently has a $400, 000 fixed rate loan at 4. 25% has paid $ 1, 976. 76 per month.
Hensling says if the homeowner were to refinance to a hybrid adjustable rate mortgage that would last for five years at 2. 875% is repaired, this would bring the monthly payment to $1,695. Reduce 57 per month and save $ 281. 19 per month.
Jeremy Brandt, CEO of WeBuyHouses. com, agrees, adding, "When a house is almost paid off, the vast majority of monthly payments will go to equity, not interest. Refinancing to an ARM could solve short-term cash flow problems by reducing the monthly payment at the expense of subsequent payments."That being said, when interest rates increase, monthly payments can increase over a period of time.
Solution # 3: Refinance from an ARM to a fixed rate mortgage
If you have an ARM, switching to a fixed rate may not lower your monthly payments now, but it may prevent your payments from getting higher. "This makes sense if current fixed interest rates are lower than the ARM rate, or if you expect to move later than the next three years, "says Brandt. However, he cautions that if you've been in an ARM for a while, the fixed rate you refinance into may be higher than your existing interest rate. rise.
"If you're worried about rising interest rates, refinancing from an ARM into a fixed-rate loan gives you the peace of mind that your payment won't change," says Brian Koss, executive vice president of Mortgage Network in Danvers, Mass.However, it agrees that it usually means a higher monthly payment to start with than the current amount.
Solution 4: Real estate transfer tax
If the value of your home has dropped, contesting your property tax may provide some financial relief. Cara Pierce, a certified real estate counselor with Clearpoint Credit Counselling Solutions, a national nonprofit organization, explains, "You need to contact the county tax assessor's office in the county where the house is located to see what kind of information is needed. As evidence that housing values have fallen, "says Pierce.
However, Pierce believes this is a short-term strategy. It warns that property values are rising and property taxes are increasing. Also be informed that it can cost anywhere from a few hundred dollars to five hundred dollars to have your home appraised.
Solution 5: Modify the loan
A loan modification is an alternative for those who cannot finance their loan but need to lower their monthly house payment. But unlike refinancing, it requires a hardship. Pierce says borrowers must show the lender that they are unable to continue making the regular monthly payment on the home due to a financial hardship. "This process involves extensive paperwork that must be completed and sent to the lender for review," Pierce says.
She recommends homeowners seek counseling through a HUD-certified organization to fully understand their options and get help contacting the lender. "However, not all lenders offer loan modifications or can only offer short-term loan modifications," says Pierce.
Solution # 6: Get a Home Equity Loan
A home equity loan can provide immediate help for homeowners, but only if you have a lot of equity in your home, which means your home will appraise too much more than you owe. Anthony Pili, director of strategic planning at Greater Hudson Bank in Bardonia, New York, advises struggling homeowners to pay off a mortgage with a home equity line of credit."Banks generally cover all closing costs on home equity lines. The savings in closing costs can be used to pay off the principal balance faster ", says Pili.
He adds that this strategy is very effective for borrowers who have the self-discipline to pay more than each month, since the minimum payment is usually only the interest accrued during the month. ..
Solution #7: Get the lender to eliminate private mortgage insurance
Depending on how much equity is in your home, eliminating private mortgage insurance (PMI) can lower your mortgage payments. "If you have at least 20% equity in the property, I recommend the lender with cancel the mortgage insurance," Pierce says. She explains that borrowers who do not usually pay 20% down must have a PMI for at least two years, but there are exceptions to the two-year rule. For example, if the homeowner has made improvements to the home that have increased the value, Pierce says the requirement can be waived.
However, not all loans are eligible for mortgage insurance cancellation. For FHA loans taken out before June 2013, Pierce says the rule is 22% lower and the homeowner must have five years of PMI. For FHA loans after June 2013, insurance may have to be paid for the life of the loan.