3 options for people struggling to pay their mortgage during the global health crisis
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- If you've lost your job due to the coronavirus and worry about affording mortgage payments, ask your lender whether they're making exceptions for people who have been impacted.
- You may choose to refinance for lower monthly payments and a lower interest rate.
- If you've built equity in your home, you can tap into your equity through a cash-out refinance or HELOC and use the money to pay bills.
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If you're concerned about affording mortgage payments, take comfort in knowing you have options. Here are three possible paths you can take moving forward.
1. Ask your lender about assistance for home owners impacted by COVID-19
You can apply for forbearance for up to 12 months without facing penalties, and the companies won't report forbearance to credit unions. They are offering mortgage modification programs to decrease monthly payments, and they are temporarily suspending evictions and foreclosures.
Some private companies are also providing relief for homeowners who have been impacted by COVID-19. In California, over 200 banks and credit unions have agreed to waive mortgage payments for 90 days without hurting borrowers' credit scores.
Bank of America is allowing customers to defer on a month-by-month basis.
"The first step, if you're looking for relief, is just to call your bank up and get someone on the phone," says Andy Taylor, general manager of Credit Karma Home. "It might be a long queue to get through, but bear with it, because it's important. And ask what your options are."
Taylor says institutions will probably ask for proof of economic hardship before agreeing to alter your mortgage payments. You may be able to show pay stubs or a letter from your employer to verify you qualify for assistance.
2. Look into refinancing with a small company
Maybe your lender isn't offering exceptions during the outbreak, or you just want to explore other options. Depending on what type of loan you have and how much of your mortgage is left outstanding, refinancing may be a good option.
When you refinance your mortgage, you take out a brand new loan with a new interest rate. If your credit score and financial history are strong, you might be able to score a lower rate than you have now.
"Probably the best way is to find your local mom-and-pop credit union," says Taylor. "Someone who isn't going to have a nationwide footprint, who isn't going to be as inundated as someone who's advertising globally online."
Lenders have been slammed with refinancing applications the past few weeks. But some small companies might be less overwhelmed, giving them the ability to act more quickly and give you personalized attention.
"Or find a local mortgage broker," Taylor continues. "Mortgage brokers can often unlock loan products that you wouldn't be able to find as a typical consumer, because they can shop around for a greater variety of loan products that are out there."
As an added bonus, you'll be helping local credit unions and mortgage brokers that might be hurting financially during the coronavirus pandemic. "You can support them, get a better rate, solve your cash flow problem, and pay a little less out of pocket every month," says Taylor. "That's a good thing all around."
3. Tap into your home equity
Have you gained equity in your home? Maybe your home's value has increased, or you've paid down your mortgage substantially. Look for ways to liquidate that equity to access cash for mortgage payments.
Taylor says homeowners with equity might consider cash-out refinancing.
Cash-out refinancing is a little different from regular refinancing. You still get a brand new loan, but now the loan amount is for more than what you owe.
Subtract the amount you owe from the amount you receive as a loan. You get to pocket what's left. You're allowed to spend that money on other financial needs - like mortgage payments.
"You could both simultaneously cash out the equity in your home - take a little bit of money that you've built up - and also lock in a lower rate," says Taylor. "That solves two problems. One, it can solve a cash flow problem, namely you're paying a lower amount every single month. And two, it means you can use that money for things like paying for the mortgage itself."
Another option opening a home equity line of credit, Taylor says. A HELOC is a second mortgage that works sort of like a credit card; use this line of credit used to pay for things, then pay back the borrowed money plus interest each month.
While money from your HELOC doesn't go toward mortgage payments, it can help you stay afloat by covering expenses like utility bills or car payments.
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