Last week we touched on a few questions many people have concerning mortgages due to the impacts the COVID-19 virus has had on the economy. Since there are quite a few important questions being asked right now we decided to answer a few more. This week will focus more on options available if you are struggling to pay your current mortgage. Here are some Answers to Mortgage Questions During COVID-19
Can I Stop Making Mortgage Payments for a Few Months?
Many homeowners are currently dealing with reduced pay, reduced hours, or even lay-offs, furloughs, and unemployment. Lenders are understanding of the current situation and how it is affecting a large number of borrowers. If you are struggling to make ends meet right now the best thing to do is call up your lender.
Don’t just stop making payments without calling up your lender and telling them about your current situation. Some lenders are offering programs to help out with situations due to COVID-19 related problems. Some lenders are allowing borrowers to put a freeze on payments for a few months, many are letting go of late payment fees, and some are holding off on reporting late payments to the credit bureaus. Just make sure you communicate upfront what is going on and that you need help. No communication can lead to foreclosure.
What is Mortgage Forbearance?
Forbearance is a program that gives homeowner permission to make lesser payments or put a freeze on making payments for a specified amount of time. At the end of the agreed-upon forbearance period the full amount owed in missed or lower payments is due. Most of the time this is expected to be paid in one large lump sum payment. Some forbearance plans do allow a payment plan though.
Forbearance is also sometimes referred to as mortgage deferment. Lenders will not be quick to offer this option so you may have to ask if it is something they would be willing to offer. If you have a great record of making your payments in full on time it increases your chances of receiving one, but with forbearance cases on the rise, many lenders are changing their forbearance rules.
What is a Loan Modification?
A loan modification, or mortgage modification, is a change to the original terms of your mortgage loan. It is not like a refinance because you are sticking with the loan you have, but making changes in hopes to be able to still pay your debt.
Loan modifications can include an interest rate adjustment, extension in the payment schedule, shifting to a different type of loan, or a combination of the three. Keep in mind a modification does make a negative impact on your credit history and score.
Modifications are made through the servicer of your current mortgage and each loan servicer has its own set of modification rules.
Related: Will a loan modification lower your payments?
What is a Cash-Out Refinance?
This is another method of refinancing your mortgage with the focus being on turning a portion of the equity (the amount your home has appreciated in value) in your home into cash. This is a strategy usually used to help fund home improvements or pay down debts. It is different from a traditional refinance which focuses on lowering monthly payments. It is also different from a home equity line of credit because it offers a fixed interest rate and replaces your first mortgage instead of becoming a second one.
If you have been paying your mortgage off on time and there is a significant amount of equity in your home, right now could be a good time to consider a cash-out refinance.
Is a Home Equity Line of Credit a Good Idea for Me?
A home equity line of credit, sometimes called a HELOC, can turn equity in your home to cash. This is usually used by homeowners looking to finance home improvement repairs and renovations. Right now many homeowners are taking out HELOCs to help pay bills.
For some people who do not have a large savings account, this could be a viable option to pull some emergency funds from. Keep in mind a HELOC is only an available option if you have a significant amount of equity built up. Homeowners with interest-only loans, 0% down loans, and homes that have only been owned a couple of years may not have enough equity to tap into.
Keep in mind that the interest rate on a HELOC is variable and will increase over the life of the loan. Though rates are low now, there is still risk with a HELOC. If you do not make payments to the line of credit this is tied to your home. If you become unable to pay back the loan you could lose your home.
Are you wondering what options are available and best for you personally right now? Please do not hesitate to reach out to me and ask me questions. I am here to help with COVID-19 mortgage options.