64% of Americans own their own homes. Homeownership is a big part of the American dream.
Owning a home is a reality many can attain thanks to record low mortgage rates and government-backed programs to support homeowners.
But what happens if you purchase a home and your financial situation heads south?
Don’t worry! If you are faced with sudden financial hardship or loss of income you have quite a few options to refinance your home and reduce your monthly mortgage payments.
We all get in over our heads sometimes. That doesn’t mean you have to lose your house.
Keep reading to learn more about refinancing options for homeowners to get you through a financial setback.
Step One: Be Proactive When Facing Financial Setbacks
The key to having plenty of options for refinancing is being proactive as soon as you realize you’re in financial trouble. It becomes much more challenging to refinance if you miss even one payment.
Although many people make the mistake of burying their heads in the sand when they realize they are in trouble, this is actually the worst course of action.
So what should you do? Contact your lender right away.
Maintaining an open line of communication is important and honesty really is the best policy. Explain your financial situation to your lender and be ready to provide proof of your claims.
For example, if your income is reduced because you can’t work due to an illness or injury, ask your physician to write you a letter explaining how long you’re expected to be out of work. Propose a dollar figure that you can reasonably expect to pay each month to your lender.
You have the upper hand here because your lender doesn’t want to foreclose on your house. A little communication can go a long way.
Although it can be hard when you’re facing unexpected expenses or a reduction in income, it’s important to keep your credit score in good shape. Make sure to make all of your minimum payments on time each month.
This includes debts like car payments, loan payments, credit cards, and your mortgage payment. When you apply for financing, your lender will pull your credit report and your credit score will have an impact on your rates.
Maintaining good credit by demonstrating that you can still manage your current debt makes you an appealing candidate when it comes to refinancing.
As always, if you can’t make any of your minimum monthly payments by the due date, it’s in your best interest to speak with those lenders. Some of them may be willing to accept a late payment without reporting it to the credit bureaus.
Refinance Options to Reduce Your Monthly Payments
For many homeowners who are facing a period of financial hardship, refinancing is an excellent option to reduce their monthly mortgage payment.
This option is best for homeowners who still have a steady stream of income, but are facing a financial hardship that eats up a large portion of that income. A common example of this is medical debt.
When you apply for refinancing, your lender will evaluate your current income situation. If you are still earning income and are still in good standing with the credit bureaus, you’ll have more options when it comes to refinancing.
Now, let’s take a look at some of the best refinance options.
1. Switch to a Longer-Term Loan
Modern homeowners are often told to opt for a shorter-term loan, like a 15-year mortgage, or even to switch to one. For some, this might make sense, if they can make the higher payments.
With a shorter-term loan, you’ll pay it off more quickly, and you’ll pay less in interest over the course of the loan. Of course, your payments will be higher.
For those looking to refinance due to financial hardship, it makes sense to do the exact opposite. Refinancing to a longer-term loan means that your monthly payments will be lower, helping you in the short term, when you need it most.
Sure, it may take you longer to pay off your loan, but it’s well worth it if it means keeping your home.
2. Switching to an ARM
If you currently have a fixed-rate loan, consider refinancing to an adjustable-rate mortgage (ARM), for a lower interest rate.
With a fixed-rate loan, your interest rate is set in stone when you take out the loan and won’t change. With adjustable rates mortgages, your interest rate may fluctuate, going up or down.
ARMs often start you off at a much lower interest rate than a fixed-rate mortgage. You’ll usually get to keep your initial rate for months, a year, or several years. Some are fixed for up to seven or even ten years.
As you can imagine, this introductory rate can be life-changing for those experiencing unexpected financial hardship. After this period, your rate will adjust based on the current market rates.
This is an especially good option if you are planning to sell your home or refinance again before your introductory period ends.
3. Today’s Rates
Today’s mortgage rates are near historic lows, particularly for long-term loans.
Refinancing to today’s rates can significantly reduce your monthly mortgage payment. You don’t have to use one of the strategies listed above to switch to today’s rates.
Many homeowners are still at the rate they locked in when they took out their loans. Mortgage rates today are in the 3 and 4 percent range. But many are still making payments with an interest rate of 5 or 6 percent.
Using today’s rates can lower their monthly payments by hundreds of dollars.
Don’t believe you can’t refinance because of the value of your home. The Freddie Mac Enhanced Relief Refinance (FMERR) program can help you reduce your interest rate and monthly payments.
This is true even if you owe more than your house is worth. Talk to your lender to find out if Fannie Mae or Freddie Mac owns your home to see if you are eligible for this program.
Refinancing With Reduced Income
It might seem like the refinancing options we’ve discussed are targeted toward those who are still receiving a stable income. Generally, this is true.
However, there are some options for refinancing for those who are experiencing a long-term reduction in income.
If you have an FHA mortgage, you may be eligible for a refinance mortgage loan through the FHA streamline program.
This program makes refinancing easy by not requiring the documentation traditionally required to refinance. This means that borrowers are not subject to income or employment verification, appraisal of their home, or bank account and credit score verification.
It’s important to note that you may be required to provide proof that you’re still working. However, you won’t have to prove your income from your job.
Since no appraisal is required, you can refinance even if your house has lost value. Refinancing through this program can significantly reduce your monthly payment.
The VA streamline is similar to the FHA streamline but is reserved for those who have a VA loan.
If you aren’t sure whether your loan is backed by the VA, consult your lender. VA loans are part of a loan program that is designed for veterans and backed by the federal government.
The VA streamline program makes it easy to refinance your home. You won’t have to provide typical loan approval documentation like income and employment verification, or credit score and bank account information.
Furthermore, you won’t be subject to a home appraisal, so your ability to refinance is not dependent on the current value of your home, not to mention it saves you the upfront expense of paying for the appraisal. Because VA loan rates are lower than other types of loans, you can save serious money though the VA streamline program.
If you are experiencing an unexpected financial hardship or reduction in income, you have a variety of refinance options available to you.
Refinancing can alleviate some of the financial burdens of homeownership and monthly mortgage payments. Whether you are experiencing a temporary setback or took out a loan with monthly payments higher than you can sustain, refinancing can change your life.
Refinancing rates are shockingly low today, so act now! These rates won’t stay low forever.
Remember that your lender doesn’t want to foreclose on your house. Lenders are here to work with you to make the most of your homeownership experience and help you through all of life’s ups and downs. Contact us today to get started and learn more about what we can do for you.