What You Need to Know About Mortgages and Foreclosure
Purchasing a home is an exciting milestone. Finalizing your purchase of the house and your home loan can feel like a major accomplishment and it’s easy to think that from here on out homeownership is going to be a breezy ride. You’ll do all of the typical tasks that a new homeowner does, like meeting the neighbors, painting some walls to match your style preferences, and calling the locksmith to change out the old locks. The house is officially yours, which also means that you now have to pay for it.
Paying your first mortgage payment may not be a major problem, but then the next mortgage payment sneaks up and the one after that and the one after that. If you start to fall behind on your mortgage payments, you risk your home going into foreclosure and having to deal with the legal ramifications of that process. To help you avoid home foreclosure at all costs, let’s take a look at how you can pay off your mortgage on time and what to do if you fall behind, as well as what happens if you are unable to avoid home foreclosure.
How to Pay Off Your Mortgage
If you’ve just bought a house and secured mortgage financing, you have plenty of time to develop strategies for paying your loan on time and avoid home foreclosure. You may even be able to pay off your mortgage early and you don’t have to dip into your emergency fund or retirement savings to do it.
One of the best strategies to pay off your mortgage early is to make biweekly payments rather than monthly payments. To do this, all you need to do is split your monthly amount in half and send that amount to your lender every two weeks. This may seem like it wouldn’t make a difference, but at the end of year you will have made the equivalent of 13 monthly payments. As you’ll be dedicating more funds to your mortgage payments, you may need to cut down on your expenses or plan for a major project, such as a home addition, for another year. The great benefit of this strategy, however, is that for a typical 30-year loan, you can take four to six years off of the loan and you can take one to three years off of a 15-year mortgage.
If biweekly payments are too much for you to keep up with, you could experience similar savings by sending in an extra payment once a year. A great way to approach this strategy is to dedicate your tax refund or a yearly bonus to the extra mortgage payment. As many people may want to use their refund or bonus to tackle home improvements like upgrading the house siding, this strategy may not work for everybody. However, if you can find enough funds to make an extra payment each year, be sure to put it toward the loan principal. If you make extra annual payments like this, you could reduce your repayment term by as much as seven years.
Some families may not be able to afford an entire extra payment every year, but you can still pay down your loan quickly by sending a little extra money for the principal each month. The amount you add to your payments is up to you, but many people will round up their regular payment to the nearest hundred dollar amount or add an even $100 to their payment amount. Before you start making payments that exceed your regular monthly bill, you’ll need to contact your lender to discuss how they handle these payments. You’ll want to be sure that your extra payments are being applied to the principal so that you can reduce your mortgage term and interest.
All of these strategies can help you pay off your mortgage on time and avoid home foreclosure. However, these strategies and strategies like them require that you have a little bit of extra money to dedicate to your mortgage payments. If you’d like to use one of these strategies but don’t have the extra income, closely examine your budget and figure out where you can cut back on expenses so that you can dedicate more money to your mortgage payments. This could mean making small adjustments, like looking for an alternative plumbing service that charges less or making major cutbacks, like canceling a family vacation. Ultimately, how you build your budget is up to you. If keeping up with mortgage payments is weighing on you and you want to avoid home foreclosure at all costs, then dedicating more of your money to your mortgage than is strictly necessary can help you meet your financial goals more quickly.
What Does Refinancing a Mortgage Mean?
If you have a loan of any kind, you’ve probably heard about refinancing. Refinancing a loan, in this case a mortgage specifically, can help you eliminate debt in a few different ways. Perhaps the most significant benefit of refinancing a loan is that you can lower your interest rate, thereby paying less over the course of your repayment term and having lower monthly payments. This is a great option to avoid home foreclosure for people who are struggling to meet their payments each month because of high interest rates.
You could also refinance your loan so that the repayment term is shorter, allowing you to get out of debt more quickly. If you started out with a 30-year mortgage, you could look into refinancing for a 15-year loan. This will mean that your monthly payments are higher, but you could cut your interest costs in half over the life of the loan. If you have the extra cash for these higher payments, refinancing your loan for a shorter term can be a great option.
Refinancing is also a possibility for commercial mortgages. If you bought a piece of commercial land for sale and are now making mortgage payments on that property, you could look into refinancing. Typically, commercial lenders allow owners to refinance 75% of the current valuation of the property. Commercial refinancing differs from home loan refinancing, so if you own commercial property you’ll want to be careful to not treat it exactly the same as your home loan. However, there is potential there to lower your interest rates and save on your commercial mortgage payments in a similar way.
What to Do If You Fall Behind on Mortgage Payments
Falling behind on your mortgage payments can be frightening, but there are still plenty of steps you can take to catch up and avoid home foreclosure. The first option is forbearance. By going into forbearance, you will put your mortgage on hold temporarily. Your lender will suspend or reduce your payments for a set period and you agree to pay with a lump sum or installments after the pause period ends. While you’re in forbearance, the record will reflect that you’re current on your mortgage. This option is best for people who are facing short-term financial hardship, as you will eventually have to pay more interest on your loan because the forbearance period stretched out the mortgage term.
As mentioned earlier, refinancing your loan can be a way to catch up on your mortgage payments. Loan modifications can work in a similar way. You’ll get a new loan with a lower interest rate or a longer term to help reduce your monthly payments. To get loan refinancing or modification, you typically need to meet the criteria that the lender provides, such as proving a financial or personal hardship that is preventing you from making your regular payments. The best way to find out if you’re eligible for refinancing or modification is to just ask your lender.
In general, going to your mortgage lender as soon as you realize that you won’t be able to make your monthly payments is the best course of action. Many lenders have options like refinancing or modification that can help you afford your monthly payments. Lenders typically don’t want your payments to go past due, as they rely on your payments to keep their business going. They’d much rather have you pay reduced amounts than no amounts at all. This means that they have solutions that can help you avoid home foreclosure, you just have to ask.
If your lender isn’t providing the solutions you need to avoid home foreclosure, look into local resources that will. Some areas have programs for homeowners struggling to make their mortgage payments, such as the Foreclosure Prevention Fund in North Carolina. There are also programs for specific demographics, such as senior citizens or members of the military. Look into options like these to help make your payments on time.
What Happens If You’re Unable to Avoid Home Foreclosure?
If you’re unable to avoid home foreclosure, the first step you need to take is understanding what foreclosure entails. Foreclosure is the process that happens when lenders take back a house from a borrower who can’t pay their mortgage. It is a legal action and lenders will go down this legal route so that they can try to get their money back. Typically, the lender — who is often a bank — will take ownership of your house, sell it, and use the proceeds from the sale to pay off your home loan.
The lender is able to repossess your home because as a part of your loan agreement, you agreed that the property you were buying would serve as collateral for the loan. That means that the lender has control over the property until the loan is paid off. If you stop making payments, the lender has the power to repossess the property, evict you and your family, and sell the property to recover their funds. Foreclosure can be intimidating to think about, but it is generally a slow process that takes a minimum of several months, so you won’t be expected to forfeit your home without ample notice.
The foreclosure process varies from state to state and lender to lender, but it typically starts with your lender sending you a notice a couple of weeks after you miss one payment. The communications from your lender may include a notice of intent to move forward with the foreclosure process, but they typically don’t initiate those proceedings until three to six months after you miss your first payment. By the end of the fourth month of missed payments, many lenders will consider your loan to be in default and will put you in touch with the lender’s attorney. At this point, you’ll need to speak with a foreclosure attorney so that they can advise you on the next legal steps you have to take.
Depending on the state where you live, you may have to go to court. In judicial states, your lender has to bring legal against you in court in order to foreclose on the property. Even though you’d be going to court, it wouldn’t look like the criminal court proceedings you see in movies and T.V. shows. In criminal court cases, the defendant is arrested, charged, and may need to work with a bail bond company to make bail. If you haven’t made your mortgage payments and are going through foreclosure, you aren’t going to be arrested and charged or need to work with a bail bondsman to make bail. You’ll just go to court with your attorney so that the judge can take the legal actions to finish the foreclosure on your home.
In nonjudicial states, you won’t have to go to court at all and there will not be a judge involved. You should still get an attorney in these states so that you understand all the details of the foreclosure process. In either type of state, you have the right to fight the foreclosure in court. Before you decide to fight it, you’ll want to speak with a foreclosure attorney to see if you have the grounds to win your case.
If you’re unable to avoid home foreclosure, be sure to look into all of your options on how to proceed. For instance, local laws typically dictate how long you can remain in a house after foreclosure so you’ll want to research those to see how long you have to find new housing. You can also ask your former lender about “cash for keys” incentives, which can help ease your transition to new housing. Many states also offer redemption, which is a period after the foreclosure sale in which you can reclaim your house. This typically requires having a substantial amount of money so that you can pay the loan balance you owe and other associated costs, but it could allow you to get your home back.
Foreclosure is a stressful process that you should avoid at all costs. Not only will you be evicted from your home, but you’ll likely have to pay late fees to your lender and legal fees to your lawyer and your credit score will drop. Avoiding foreclosure at all costs is important. Use strategies to pay your mortgage on time and always talk with your lender if you have trouble making payments.