For many homeowners, there isn’t a scarier word than this.
Some homeowners are scared to say it out loud, lest they bring it upon themselves. For others, a home foreclosure might sound farfetched, that is until life happens, and suddenly, it becomes a very real possibility.
As we’ve seen with recent societal and economic events, your situation can sometimes change with a snap of a finger. Jobs can vanish. The markets can swing wildly. Banks can falter. And suddenly, you’re falling behind on your mortgage payments. Before you know it, your lender is on your neck, hounding you about making good on your mortgage payments.
Then, you find yourself in pre-foreclosure and, before you sneeze, foreclosure!
When foreclosure comes knocking, it can feel like you’re out of options, especially if lenders are getting more aggressive in demanding repayments.
The good news is that mortgage refinancing can help prevent foreclosure from happening. (USA.gov) Refinancing your mortgage means renegotiating the terms of your loan with your lender and paying off your old loan. You can change the interest rate, the principle, the length of the loan, and more.
How Mortgage Refinancing Works
If you refinance your mortgage, your bank will replace your current mortgage loan with a new one. (Bankrate) This gives you somewhat of a fresh start.
The steps to refinancing a mortgage are pretty straightforward; however, it can be a little more complicated to satisfy mortgage delinquency.
You will need to communicate with your lender. They may be open to working with you to refinance the mortgage to avoid foreclosure or offer alternatives to bring your loan current.
For the best chance of approval, you will have to do so before you’ve missed any payments.
Steps to Refinancing Your Mortgage
- Know where you stand – To refinance a delinquent mortgage, you will first need to meet your lender’s loan and borrower requirements. The amount of equity in your home plays a major role in your ability to refinance and determines the loan type you qualify for. Also, your credit score will affect your interest rate on the refinance loan. If you have already missed payments, it means your credit score will have taken a hit. So, it’s best to refinance the mortgage ASAP.
- Collect your documents – Prepare for the application process by putting your financial documents together. You’ll need to provide proof of employment, income, assets, and other info. Collecting everything and having it ready will help to hasten the process.
- Compare lenders – To get a refinance loan with the best rate and terms, you will need to shop around. (Experian) Since you’re looking to refinance a delinquent mortgage, begin with your current lender. However, you’re not tied to them. Other lenders may have various loan options to help you refinance the mortgage. As you compare loan options, remember to carefully review the terms of each loan. To determine the best home loan for you, be sure to look at the interest rate, annual percentage rate (APR), monthly payment, total number of payments, and total amount paid.
- Apply to the home loan with the best terms – Once you decide on a lender, submit a full application for the loan and initiate the underwriting process. Your lender will verify the value your home’s value through an appraisal. You may need to provide extra documents and info during the underwriting process.
- Close on the new loan – When the underwriting process is over, it’s time to close on the refinance loan. The new home loan will replace the delinquent mortgage, and you will have a new mortgage with better payment and loan terms.
Based on how you refinance your mortgage, you can expect one or more of the following:
- A lower interest rate
- A change in the structure of your loan
- A change to your monthly payment amount: Your monthly payment amount due may decrease if you increase the life of your loan. Similarly, if you shorten the life of your mortgage to save money on interest, your monthly payment amount due may increase.
- A change to your mortgage’s term: Increasing the life of your home loan will lower your monthly payments but may increase the total amount of money you will pay over the life of your loan.
- The possibility to cash out some of the equity in your home.
Changing the structure of your loan can save you money, regardless of whether most of the other major mortgage terms stay the same.
For example, achieving 20 percent or more in equity in your home means you can stop paying for private mortgage insurance (PMI). But depending on the terms of your loan, you might need to refinance it to take advantage of this opportunity.
Mortgage refinancing is common with homeowners who have disposable income and want to use it to pay off their mortgages more quickly to save money in the long run.
Because refinancing involves replacing a mortgage with another one, it’s difficult to get approved if you’re currently struggling financially.
To refinance your home, you need to show that you’re financially fit to afford a new home loan. Eligibility may require a certain income and credit score. You may also need to prove that you have no other significant debts, such as a second mortgage.
Who Is This Option Good/Not Good For?
Mortgage refinancing is a good option if you’re current on your mortgage payments but would benefit from a reduced payment in the future.
Refinancing can be a good option if you need to lower their monthly payment because of an unforeseen change in income or financial situation.
This option is also recommended to homeowners who have substantial equity in their homes and would like to cash out some or all of it to cater to other expenses.
Can I Refinance if I’m in Foreclosure?
If foreclosure proceedings are already in progress, you can’t refinance your mortgage.
If your lender has started foreclosure proceedings, it means they’re no longer willing to negotiate and will continue with the foreclosure instead.
If you plan to refinance, aim to be current on your payments and refinance into a more affordable payment before you’re in serious financial trouble.
"Bankrate." 10 5 2022. What is mortgage refinancing and how does it work? <https://www.bankrate.com/mortgages/how-does-refinancing-a-mortgage-work/>.
"Experian." 2 6 2022. How Long Does a Foreclosure Stay on Your Credit Report? <https://www.experian.com/blogs/ask-experian/how-long-does-a-foreclosure-stay-on-your-credit-report/>.
"Experian." 23 8 2022. How Does Refinancing a Mortgage Work? <https://www.experian.com/blogs/ask-experian/how-does-refinancing-a-mortgage-work/#:~:text=Go%20through%20the%20preapproval%20process%20with%20multiple%20mortgage%20lenders%20so%20you%20can%20compare%20interest%20rates%20and%20other%20terms.>.
"USA.gov." 8 7 2022. Foreclosure. <https://www.usa.gov/foreclosure>.