Buying a home is a significant investment, but understanding the expectations of assuming a mortgage will ensure that you enjoy it for a long time. New homeowners begin this journey with the best intentions, but a delinquent mortgage can quickly amplify. If you stop making mortgage payments or continually make late payments, it can be challenging to bring your loan back to good standing and cause months or years of financial headaches. Planning for unexpected situations, as well as the routine costs of owning a home, can help you avoid foreclosure or bankruptcy when emergencies arise.
Mortgage budgeting tips
TIP 1: Set up a budget.
The expenses of owning a home go beyond the monthly mortgage and utility payments, and they can create financial difficulties. If you are a first-time home buyer, many of the problems that you simply turned over to the landlord (or your parents) are now yours to fix and pay for. If you have moved from a small house into a larger one, you may find the expenses of maintaining the property have grown along with its size. In either case, careful planning and budgeting are essential to guard against financial problems in the future.
For some homeowners, it might make sense to commit a certain percentage of your monthly income for your home just above what is needed every month. Write down your expenses or use online budgeting tools to help you see where your money is going. You’ll avoid surprises and headaches when it’s time to submit your payment each month.
TIP 2: Establish an emergency fund for repairs or updates.
Mechanical failures in the plumbing, electrical and heating systems always seem to occur at the worst possible time. If you have purchased an older home, complete replacement of water heaters, furnaces or kitchen appliances may be needed. Be sure to also have your home inspected by a licensed professional.
Now that you know your overall expenses from tip #1 above, set aside a percentage of your monthly income in a separate savings account dedicated to your home costs. Label it in your account "Emergency Fund" (or similar) to remind you what it’s for. If you can have direct-deposits into this account from your employer, that will ensure that the account grows over time without thinking much about it.
TIP 3: Have a backup plan in the event of illness or expected loss of income.
More homeowners lose their homes because of illness, loss of employment or marital problems than all other reasons combined. None of us factor these things into our plans for the future. But, you should know about some of your alternatives if you find yourself in such a position. It is much easier to look at alternatives and plan a practical course of action before you are in trouble.
Sometimes you can see the trouble coming before financial problems begin. An advance notice of a layoff means the family income will be severely cut back. It may even be eliminated in the near future. A major medical operation or property repair bill may be more than you can afford to repay, even with a short-term loan. You have to address the situation as soon as possible or risk losing your home.
There can be many local sources that can help you get over the hump. Churches and civic groups may have assistance programs or may know what is available. Non-profit organizations, particularly housing assistance groups or counseling agencies, may manage special assistance programs. State and local housing agencies are also places to inquire to help.
Refinancing your mortgage
You can put the above tips into practice and still not have much financial wiggle room. If that ends up being the case, you may consider refinancing your mortgage. Lenders recommend a refinance if your current rate is 1-1.5% higher than current market rates.
So what’s the benefit of a mortgage refinance? Well, by lowering your rate, you’ll also be lowering your monthly payment. This can save you hundreds of dollars every month!
Maybe you’re wanting to switch from a 30-year mortgage to a 15-year mortgage. Refinancing allows you to take advantage of those same low rates, less interest, and major savings over the course of your loan.
Eliminating PMI
Tired of throwing away money on private mortgage insurance (PMI)? Once your mortgage balance is less than 80% of your home’s value, you can do away with PMI for good. The best way to get rid of PMI is to make an occasional extra payment. Just make sure these additional funds are applied to the principal on your loan balance. But keep in mind that getting rid of PMI can require additional payments or a refinance. That might be well and good, but do this with your full finances in mind. Check out our Mortgage Refinance Content to be sure.
Paying off your mortgage early
There’s no better feeling than paying off your mortgage and owning your home outright. While it may seem like a pipe dream now, you can attain your goal of being mortgage-free by taking baby steps. Pay slightly more than the minimum monthly payment, make an extra payment when you can, cut costs and apply the savings — it all adds up.
Putting your equity to work
As a refresher, equity is your home’s worth minus what you owe. If you’ve lived in your home for a number of years, chances are you have quite a bit of equity. You can use these funds to pay for home improvements or tackle high-interest debt, such as credit cards. Borrowers can access their equity with a refinance, a home equity loan, or a home equity line of credit (HELOC).
What happens if your mortgage is delinquent
Your payment is considered late if the lender receives it after the due date. You’ll know you’re behind on mortgage payments when you begin receiving notices that payments are late. Don’t be surprised if the lender charges a late payment fee when the money is not received within 15 days of the due date (the timing and amount of late charges may vary from lender to lender). Payments made, including any late charges assessed, before the next payment due date will be accepted by the lender. But it’s not uncommon for your debt to go to collections if you get too far behind.
Know you can find yourself in trouble if you owe two or more mortgage payments at a time. And if three or more mortgage payments are overdue and unpaid, foreclosure proceedings may be initiated. In addition to the loan payments due immediately, you are liable for legal fees incurred by the lender. At this point, you are in danger of losing your home.
What to do if you default on your mortgage
Defaulting on your mortgage can add the cost of various fees to the amount you already owe. It also can damage your credit score, or even result in foreclosure (if you cannot come up with the funds).
However, foreclosure costs lenders more money than they can make back from the foreclosure sale. Expect your lender will try and work with you if you get behind on payments, so long as it makes sense to both parties. In many cases, they can devise a practical plan to cure the default and bring the loan current, whether it’s making modifications to your loan or allowing for a more affordable payment plan (to save your home from foreclosure).
If you are falling behind on your payments, or know that you are likely to in the immediate future, there are some steps that you should take before talking with your lender:
- Prepare a monthly list of your income and expenses, using realistic figures based on your current financial situation.
- Put together a complete financial disclosure package, showing your assets and liabilities, including all debts and monthly payments and when they are due. Pay stubs, unemployment check stubs or other proof of current income should be in the package, along with two years’ tax returns.
- Get an estimate of the value of your property. You can usually get a local real estate broker to give you an idea of the current market value, free of charge.
- Prepare a written explanation of your situation for the lender. Offer any plan or suggestion you may have on how you can bring the loan current.
Keeping the lines of communication open is critical to preventing issues with your loan. Be upfront and honest, and certainly be ready to follow the payment plan as you’re expected. It’s unlikely you’ll receive another chance should you find yourself in future financial troubles.