The federal government recently passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to assist Americans during the COVID-19 pandemic. The new law includes provisions for homeowners, one of which requires loan servicers to offer mortgage forbearance. There are several misconceptions about this relief service. If you’re considering this option for yourself and your family, this is what you need to know about mortgage forbearance.
First and foremost, mortgage forbearance is NOT mortgage forgiveness. Forbearance means that your loan payments will be deferred for a certain period of time, after which you will be responsible for those payments. According to the CARES Act, your loan will accrue interest during forbearance, but it will not be subject to additional interest or fees. Some loan servicers may request multiple months’ worth of payments at the end of forbearance, so you need to contact your lender to understand their repayment terms. The CARES Act stipulates an initial forbearance period for federally backed loans of 180 days, with an extension of 180 days if requested by the borrower. Forbearance is essentially a grace period where your payments will not be due monthly in order to provide immediate relief.
The government’s forbearance program covers mortgages backed by federally sponsored agencies: Fannie Mae and Freddie Mac. Your loan servicer may have their own forbearance options if you did not get your mortgage through a federal program. If you’re interested in mortgage forbearance, you need to contact your loan servicer to see if you qualify and what their terms of repayment are. Call the number located on your monthly mortgage statements to reach your servicer.
As mentioned in the CARES Act, your credit score should not be affected during forbearance, nor will you be charged any late fees. However, there is uncertainty around this topic and we’ll update this page as we get more information. One thing to be aware of is that your account will maintain the status it was in when it went into forbearance (i.e. current, delinquent, etc.) while in forbearance. If possible, be sure your account is current before going into forbearance. If you anticipate you will need more time in forbearance, reach out to your loan servicer before your initial term ends to ask what options are available. Understand that if you’re still able to make monthly mortgage payments, you should continue to make them.
This is a very uncertain and even stressful time for many homeowners, therefore it’s even more important to do your research before you sign up for any relief program. Make sure you have a thorough understanding of your loan servicer’s conditions so you won’t encounter any unpleasant surprises down the road.
If you decide forbearance isn’t for you, explore the idea of refinancing.
If you are a homeowner, you may have considered refinancing your current mortgage. Refinancing can offer many advantages to help you meet your financial goals. If you are just starting to look into refinancing, or have been thinking about it for a while, here are three benefits that you should consider.
Lower Interest Rate
It may be possible to obtain a lower interest rate by refinancing your current mortgage loan.* A lower interest rate means that your monthly mortgage payments would be lower. This could save you money monthly or you could make payments directly to the principal of your loan, allowing you to build your home equity quicker and reducing your interest. A lower interest rate is the most popular reason that homeowners choose to refinance.
Cash Out Your Home Equity
You can take advantage of the equity you have built in your home with a cash-out refinance. To take advantage of this, you would refinance your current mortgage for more than the amount you owe, and keep the extra money. For example, if you owe $150,000 on a home worth $250,000, you have $100,000 worth of equity in your home. You could refinance your home for $175,000, and receive a check for the $25,000 difference. You could use this money for home improvements and remodeling, or any other household needs you may have.
Change Your Loan Type or Term
Another refinancing option is to shorten your loan term, so you pay your home off in less time. For example, you might switch from a 30-year loan to a 20-year loan. This would allow you to build equity faster, and pay off your loan in less time, with the same (or marginally higher) monthly payments. If you have an adjustable-rate or interest-only loan, you may be able to refinance to a fixed-rate loan product that may save you money over the life of your loan, and may allow you to build equity.
Whether you want to lower your monthly payment, build equity, or get cash for projects, refinancing can be a step towards meeting your financial goals. To find out if refinancing is right for you, talk to one of our licensed Mortgage Loan Originators today!
*Refinancing an existing loan may result in the total finance charges being higher over the life of the loan.
Refinancing is when you get a new mortgage to replace your existing mortgage. Most of the time, people refinance their mortgage when they are looking to reduce their monthly payments using the equity on their home (the difference between the amount owed and how much the home is currently worth).* Other reasons include changing from an adjustable-rate to a fixed-rate mortgage; avoiding balloon payments; cashing out to consolidate debt; consolidating a mortgage and a home equity line of credit; and even addressing family matters such as divorce. When you refinance, your first loan is paid off allowing the new mortgage to be created and placed as a first lien on the property.
If you think refinancing your home loan is something you might be interested in, ask yourself the following questions to see if refinancing is a good option for you:
– How long do I plan to stay in my current home?
– How much do I owe on my home?
– What is my interest rate and what are the current interest rates available?
– Can I afford to pay the costs associated with refinancing?
– Why do I want to refinance?
Once you have asked these questions, it’s time to assess your situation. You must check your equity, debt, and available cash, as these 3 items can greatly impact your ability to refinance your home. Here are the reasons why these 3 items are often problems for homeowners who wish to refinance:
Ideally, you only want to refinance your current loan once. Usually, you have to plan to be in your house for a while for refinancing to make sense. You also have to figure out where you stand with your current mortgage and investigate whether or not your loan has a prepayment penalty (where you are charged a fee when you pay off your mortgage early). Furthermore, consider how long it will take you to recoup the closing costs of the new mortgage. Even though you will be making lower payments, extending your mortgage term can wind up costing you more in the long run. Make sure the timing and circumstances allow this to be the right time to refinance your mortgage.
If you believe you are ready, follow these 5 simple steps to refinance:
If you are ready to refinance your current mortgage, have any questions regarding the process, or want to find out if refinancing is right for you, please contact one of our Licensed Mortgage Loan Originators by clicking here.
*Refinancing an existing loan may result in the total finance charges being higher over the life of the loan.
Throughout its course of existence, a loan takes on various forms of being: application, amortization, re-finance, maturity. It could stay in the lender’s portfolio for its duration or move into the exciting world of the secondary market. It may split off into two loans if the borrower decides to obtain a home equity line of credit (HELOC) or a second mortgage. A loan could even pay money to its borrower in the form of a reverse mortgage!
What exactly happens throughout the life (or lives) of a mortgage loan?
A loan comes to life when a borrower decides they want to purchase a piece of real estate and obtain a mortgage loan or they want to re-finance their current mortgage. A borrower may apply for pre-approval of a loan to help determine what they can afford.
Once someone finds a piece of property they wish to purchase, they may officially apply for a loan. Even though the borrower may have already applied for pre-approval, it is not a guarantee, so they must apply again. To apply, the borrower must submit the names, social security numbers, and the monthly income of all applicants, the subject property address, and the estimated value of the property being bought or refinanced. During the application process, the amount of the loan and the down payment are determined by the borrower. At this point, the lender determines if the individual is able to qualify for a loan amount.
A loan officer takes the borrower’s application and collects the items needed for review. Here is a list of items a borrower should be prepared to submit to their loan officer:
The loan processor puts all these items together, orders a title, helps schedule an appraiser to determine the value of the property, and then sends the application to underwriting.
In the underwriting process, the lender determines the degree of risk involved with lending the borrower money. Here are the “three C’s” that are evaluated in underwriting:
Credit: A credit report is obtained from each of the three credit bureaus—Equifax, Transunion, and Experion. These reports are analyzed to determine how well a borrower manages debt.
Capacity: Capacity is a borrower’s ability to make payments on the loan. The borrower’s employment and income is evaluated along with their current debt and assets (debt-to-income ratio).
Collateral: When looking at collateral, the lender evaluates the type of property, value of the property, and cost. To determine the value of a piece of property, an appraiser is sent to analyze various factors.
Once the underwriter grants approval, a clear to close is processed and the settlement date can be scheduled.
The closing on a loan is where all the necessary paperwork is presented and signed. At closing, the title of the property is transferred to the buyer, an escrow account is set up, the amortization schedule is issued, funds are obtained by the borrower, and the security interest of the lender has been recorded by the County or City Clerk.
Once a loan is closed, it splits onto two different paths: the lender’s path and the borrower’s path.
On the lending side, a mortgage loan can either remain in a lender’s portfolio or enter the secondary market. In the secondary market, loans are sold by lending institutions to private and public investors such as Fannie Mae and Freddie Mac to be sold as mortgage backed securities. The secondary market allows lenders to replenish cash reserves so that they can originate more mortgages to consumers.
From a borrower’s perspective, after closing the borrower then makes payments on the loan following an amortization schedule. By refinancing or taking out a Home Equity Loan or Line of Credit, the loan can be modified at a later date depending on the borrower’s future financial needs.
Interest rates are currently at historic lows in which people with existing mortgages may want to take advantage of. By refinancing, a borrower can reduce their monthly payments as well. Or a homeowner may also desire a large amount of cash for home or remodeling for safety reasons (only available if borrower is occupying the property). For these and other reasons, the option to refinance a mortgage is often available.
If someone is in need of a large sum of money, they may consider taking out a second mortgage on their home, otherwise known as a Home Equity Loan. This allows a homeowner to use the equity that they have established in their home to remodel, pay off other debts, pay for their children to go to college, or whatever else they choose to do with their equity. These loans typically have higher interest rates since they are a higher risk for the lender.
A Home Equity Line of Credit (HELOC) is also considered by homeowners that wish to take advantage of their equity. What makes a HELOC different from a traditional home equity loan is that the borrower does not receive the amount of equity up front, but instead has it as a line of credit in which the maximum amount that can be borrowed is their amount of equity. Unlike a traditional credit card line of credit, a borrower’s home is used as collateral.
A reverse mortgage is targeted towards senior citizens, 62 years of age or older, who wish to use their home equity to supplement their income. This type of mortgage is called a “reverse” mortgage because instead of making monthly payments to a lender, the lender makes payments to the homeowner. There are also no income or credit score requirements, although the homeowner is responsible for taxes, insurance, and maintenance of the home. In order to qualify for a reverse mortgage loan, the borrowers may not be delinquent on any federal debt, must live in the home, own the home outright or have a mortgage balance that can be paid off at closing with proceeds from the reverse mortgage loan. The loan does not have to be paid off until the borrower moves, sells the home, does not live in the home for twelve consecutive months, fails to pay property taxes or homeowners insurance, lets the home deteriorate beyond reasonable wear and tear, or the last surviving borrower passes away. Afterwards, the estate generally has six months to repay the balance or sell the home.
After making regular payments on a loan, the loan matures the date it is due to be paid off. If a loan is not paid off by its’ maturity date, it enters into default. Depending on the amortization schedule, there may or may not be a balance of principal due on this date.