If you’re a homeowner who’s struggling to pay your mortgage, you’re not alone. Data firm Black Knight reports that U.S. housing affordability is now at its worst level since 1984. And in July, the monthly payment on a typical home took up 38% of a median household’s income.
That’s problematic, because home buyers are generally advised to keep their predictable housing costs to 30% of their income or less. And that 30% threshold is supposed to account for property taxes and homeowners insurance as well — not just a mortgage payment.
If you’re having trouble affording your mortgage, you might assume that you’re doomed to lose your home to foreclosure. But there’s another option worth pursuing before you give up on being able to stay in your home.
Refinancing a mortgage is a good way to make your monthly payments more affordable — that is, when mortgage rates aren’t through the roof. Right now, mortgage rates are sky high. So unless you happened to get stuck with an extraordinarily high interest rate when you signed your home loan, refinancing at current rates probably won’t help you. What may help you, however, is reaching out to your mortgage lender and talking through your options for loan modification.
Unlike refinancing, where you swap an existing mortgage for a brand-new one, with mortgage modification, you’re simply changing the terms of an existing home loan. It may be that under your current mortgage, you have 20 more years of payments, resulting in individual payments of $1,200.
If you can’t afford $1,200 a month at this point, you might be able to change the terms of your mortgage so that you’re paying it off over a longer time frame. That might result in monthly payments of, say, $800, which may fall within your budget.
And if you’re wondering why your lender would agree to mortgage modification, it’s simple. Lenders want to get repaid on the loans they write. They don’t want to deal with the foreclosure process because it can be costly and time-consuming for them. So if modifying your mortgage allows you to keep making payments on it, that’s a solution that might work out well for your lender — and for you.
If you’re having trouble affording your mortgage, another solution might be to ask to put your loan into forbearance. During forbearance, you can pause your mortgage payments without being flagged as delinquent, thereby eliminating the risk of foreclosure (at least during your forbearance period).
But forbearance is generally a good solution when you’re experiencing a temporary hardship that makes your mortgage hard to keep up with for a limited period. If, say, you’ve lost your job, then forbearance could make sense.
But if you generally just can’t afford your mortgage anymore, then you’re probably better off modifying your mortgage instead of pausing payments on it. Forbearance might create a scenario where you don’t have to worry about losing your home for six months, but from there, the risk of foreclosure becomes real again. Lowering your payments could make it possible for you to stay in your home in the long run, rather than just kicking the problem further down the road.
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