If you met the prerequisites to purchase your home but are now struggling to make your mortgage payments, you're not alone. According to RealtyTrak, 1 in every 2,005 homes is in foreclosure. In New Jersey, it’s 1 in every 718 homes; in Maryland, it’s 1 in every 1023 homes. You may feel that you’re also on the fast track to becoming another foreclosure statistic. However, don’t give up yet. You may be able to lessen your mortgage woes by reducing your monthly mortgage payments. Every situation is different, so Investopedia spoke with several mortgage experts to find seven different options.
Solution #1: Refinance to a Longer-term Loan
Spacing your loan out over a longer period is one option that can reduce your monthly payment amount. Refinancing to a longer-term loan is the simplest way to reduce monthly mortgage payments–especially when cash flow is a problem, according to Al Hensling, president of United American Mortgage in Irvine, California.
However, it's important to note that your interest rate will increase. To offset this, Matt Hackett, underwriting, and operations manager at New York-based Equity Now says the majority of mortgages have no prepayment penalty: “As a result, once your financial situation improves, I recommend making higher payments to increase the speed at which you pay down the principal,” says Hackett.
He also advises homeowners to make sure pre-payments are allowed without penalty and suggests they determine the difference between their current rate and the new rate on the longer term loan to see if it makes sense.
Solution #2: Refinance to an ARM
Refinancing to an adjustable rate mortgage (ARM) is a viable option if you’ve almost finished paying off your mortgage. “More and more consumers recognize the financial benefits an adjustable rate mortgage can provide under the right circumstances,” says Hensling. A perfect example is a homeowner that anticipates selling their home in the next three years and currently has a $400,000 fixed rate loan at 4.25% paying $1,976.76 per month.
Hensling says if the homeowner refinanced to a hybrid adjustable rate mortgage fixed for five years at 2.875%, this would reduce the monthly payment to $1,695.57 per month and save $281.19 per month.
Jeremy Brandt, CEO of WeBuyHouses.com, agrees, adding, “If a home is nearly paid off, the vast majority of the monthly payments are going to equity and not interest. Refinancing to an ARM might solve short-term cash flow issues by reducing the monthly payment at the expense of subsequent payments." That being said, if interest rates start increasing, the monthly payments may increase over a period.
Solution #3: Refinance From an ARM to a Fixed Rate Mortgage
If you have an ARM, switching to a fixed rate may not lower your monthly payments, now, but it can stop your payments from going higher. “This makes sense if current fixed rates are lower than the ARM interest rate, or if you expect to move later than the next three years,” says Brandt. However, he warns that if you've been in an ARM for a while, the fixed rate you refinance into may be higher than your existing rate and this can cause your monthly payment to go up.
“ If you are worried about rates rising, refinancing from an ARM into a fixed-rate loan provides the peace of mind of knowing your payment won’t change,” says Brian Koss, executive vice president of Mortgage Network in Danvers, Massachusetts. However, he agrees that it usually means a higher monthly payment to start with than the current amount.
Solution #4: Challenge Property Taxes
If the value of your home has dropped, challenging your property tax may provide some financial relief. Cara Pierce, a certified housing counselor at Clearpoint Credit Counseling Solutions, a national nonprofit organization, explains, “You'll need to contact the county tax assessor's office in the county in which the house is located to see what type of information they will need as proof that the housing values have dropped,” says Pierce.
However, Pierce says this is a short-term strategy. She warns that property values are increasing, and as they do, the property taxes will rise. Also, be advised that it may cost anywhere between a few hundred dollars and five hundred dollars to have your home appraised.
Solution #5: Modify the Loan
A loan modification is an alternative for those who cannot finance their loan but need to lower their monthly house payment. But, unlike a refinance, it requires a hardship. Pierce says borrowers must show the lender that as a result of a financial hardship, they are not able to continue making the regular monthly house payment.“This process involves extensive paperwork that must be completed and sent to the lender for review,” says Pierce.
She recommends that homeowners get counseling through a HUD-certified organization to fully understand their options and get help contacting the lender. “However, not all lenders offer loan modifications or may just offer short term loan modifications,” says Pierce.
Solution #6: Get a Home Equity Loan
Getting a home equity loan may provide immediate assistance to struggling homeowners, but only if you have a lot of equity in your house, which means that your home is valued at much more than you owe on it. Anthony Pili, director of strategic planning at Greater Hudson Bank in Bardonia, New York, advises struggling homeowners to consider paying off a mortgage with a home equity line. “Banks usually cover all closing costs on home equity lines. The savings in closing costs can be used to pay off the principal balance quicker,” says Pili.
He adds that this strategy is highly effective for borrowers who have the self-discipline to pay more than what is owed each month, since the minimum payment is usually just the interest that has accrued during the month.
Solution #7: Get the Lender to Eliminate Private Mortgage Insurance
Depending on how much equity is in your home, eliminating the private mortgage insurance (PMI) can lower your mortgage payments. “If you have at least 20% equity in the property, I recommend contacting the lender about dropping the mortgage insurance,” says Pierce. She explains that borrowers who usually don’t pay 20% down are required to have PMI for at least two years, but says there may be exceptions to the two-year rule. For example, if the homeowner made improvements to the house that increased the value, Pierce says the requirement may be waived.
However, not all loans are eligible for mortgage insurance to be dropped. For FHA loans taken out before June 2013, Pierce says the rule is 22% down, and the homeowner is required to have five years of PMI. With FHA loans after June 2013, the insurance may have to be paid for the lifetime of the loan.
The Bottom Line
If you’re struggling with your mortgage, don’t throw in the towel. There are various solutions that can help you stay in your home and manage your monthly mortgage payments.