Serious financial trouble can hit you when you least expect it. You either lost your job, your business may not be doing well, or circumstances with your investment fared terribly. These setbacks can lead to much stress, especially when you know you can no longer pay for your mortgage and you risk losing your home.
When this happens, know that you have a way out. Let’s look at the most common solutions to this common mortgage dilemma:
Use Your Home Equity
If you are among the homeowners who benefited from the recent rise in home prices, chances are, you have significant equity in your home which you can use to either: a) cash out, b) use for a standard second mortgage, or c) use for a HELOC loan.
To determine your equity, you have to take the difference between your current home value, and your outstanding mortgage balance. The higher your equity, the better.
You can also calculate your Loan-to-Value (LTV) ratio by dividing your current mortgage balance by your home’s market value. Unlike your equity, the lower your LTV ratio is, the better.
A cash-out refinance usually allows you to take out around 70 to 80 percent of your home’s value.
On the other hand, a standard second mortgage, also known as Home Equity Loan, is another loan secured against your home and is offered at higher interest rates than your first mortgage. It provides you a lump sum at closing and is paid back in fixed monthly installments.
Meanwhile, a HELOC or Home Equity Line of Credit allows you to access your equity in draws. The lender will give you a checkbook or debit card you can use to borrow from your equity, like you do with a credit card.
Refinance Your Mortgage
Today’s low rate climate is the perfect season for refinancers. By refinancing into a lower interest rate, you have a chance of lowering your monthly payments and saving up thousands of dollars on interest.
Another strategy of using refinance to reduce monthly payments is refinancing to restructure your loan term. If you are currently carrying a mortgage with a 15-year term, you can extend your loan life to 30 years and stretch your payments during that period. You can always refinance back when your finances get better.
Manage Your Other Debts
Maybe you don’t have to touch your mortgage but instead focus on other debts that’s causing you trouble. Your credit cards, for example, can carry interest as much as 22 percent. You can coordinate with your creditor to restructure your interest. These creditors are willing to work with you on such instances because they know you defaulting on your loan could also mean loss on their investment.
Loan modification programs are designed to help struggling borrowers reduce their mortgage payments down to 31 percent of their monthly gross income. This is to help the borrower lower the risk of foreclosure and prevent its damage to the borrower’s credit.
The federal loan modification program HAMP (Home Affordable Modification Program) modifies one of the following components of your mortgage:
- interest rate
- loan term
- loan principal
Talk to your lender to know if you qualify for this program, or any other loan modification program, for that matter.
Access Your 401k
Another way to get out of your mortgage dilemma is to make a loan against your 401k funds. You can take out as much as 50 percent of your funds with no tax penalty.
You can also opt to just withdraw from your funds but that endeavor is taxable and you may end up losing some of your savings instead. Do not go into this path unless it’s the only option left.
Limit Your Lifestyle Expenses
Little ways can go a long way in helping you ease your burden. Simply cutting back on your splurges in favor of budgeting is a subtle yet effective way to iron out the mess that you are in. This, coupled with the above solutions, can help you fix an exhausting financial brawl.