For most homeowners, their mortgage is their biggest monthly expense. But job losses around the country are hammering people’s finances, causing challenges for managing their cash flows and leaving many to wonder how they will pay their mortgage and maintain their home.
While things may seem grim, there are options for homeowners struggling to pay all their bills.
“It’s not really that people can’t pay their mortgage,” said Lauren Kovar, CPA and member of the AICPA Consumer Financial Education Advocates. “Rather, it’s an issue of cash flow. Income is not enough to cover expenses. Mortgages just draw more concern because they represent your home.”
Kovar said anyone struggling to pay their bills and concerned about paying their mortgage and losing their home should take a holistic view of all income and sources of cash, monthly bills owed and options for deferring or reducing those payments.
Review money coming in, money going out
First comes the basic stuff: cut unnecessary expenditures. Most have heard suggestions of cutting their morning cup of coffee and eating out. But Kovar advises to look at savings too, such as redirecting monthly contributions to a retirement or college fund to cover monthly bills.
Next, Kovar says to contact all lenders about relief options. Some credit card companies have been offering a no-fee and no-interest grace period during the pandemic that may allow some to people to temporarily reduce their credit card payments, freeing cash for other purposes.
Understand CARES Act and other mortgage relief options
The federal Coronavirus Aid, Recovery and Economic Stimulus (CARES) Act gives homeowners experiencing financial hardship 180 days to request a mortgage forbearance. Forbearance puts on-hold interest and payments for a few months to allow homeowners the opportunity to better manage their short-term cash flow issues.
Under forbearance, payments are not forgiven, rather homeowners will have to repay them either through a lump sum, spread out over the life of the mortgage or added on at the end of the mortgage. There are no additional fees, penalties or interest accrued during forbearance. But homeowners must contact their lenders to initiate the process. You only have to show you have a pandemic-related financial hardship to qualify.
Kovar said forbearance is a particularly ideal option for people currently trying to sell a home. Since the pandemic slowed real estate transactions, forbearance allows a homeowner to avoid mortgage payments while they wait for the real estate market to recover, and the loan should be repaid once the home sells at no additional cost to the homeowner.
Still, if you can continue to make payments and do not need forbearance, Kovar advises continuing to do so.
“The loan is still due. You’re just kicking the can down the road,” she said.
Beyond forbearance, many lenders will work with you to modify your existing mortgage. Modifications can be any change in your mortgage terms from reducing interest rates, changing loans from adjustable to fixed rate or lengthening the loan from 15 to 30 years. The modification options differ by lender, and not all banks offer them. Also, modifications are listed on a credit report and may reduce your credit score, hampering your ability to borrow in the future.
Given the pandemic and widespread job losses, many mortgage lenders have created simple online forms and applications to help those in need, so homeowners should contact their lenders to learn more if needed.
Consider the long-term financial impact of your mortgage
With mortgage interest rates so low, refinancing or home equity loans may seem like an attractive solution, but Kovar says those options may not be ideal for many.
“Refinancing has a cost, and it’s a long process; if you’re worried about getting through just the next few months, refinancing may not be a good option,” she said.
And she warns against taking on additional debt through home equity loans or excess credit card spending.
“The stress of additional debt can affect you significantly, both emotionally and financially,” she said, adding that anyone considering this option should consult win their CPA.
Regardless of the option one pursues, the most important thing Kovar advises is to never stop making payments to anything with collateral or assets. Mortgages and car loans are typically backed by the property as collateral. And a credit score is an asset, and ceasing to make credit card, mortgage and car payments can severely hamper your credit.
“You don’t want the bank foreclosing on your home or repossessing your car due to missing payments,” she said.