How to Stress Less About Your Mortgage
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Getting through the homebuying process is no easy feat, but once you make it to the other side another challenge awaits — managing your mortgage. It takes time to adjust to homeownership, and you may experience some mortgage stress along the way. Fortunately, there are ways to minimize it.
7 tactics to take down mortgage-related stress
Consider these seven strategies to help reduce some of the financial stress attached to paying your mortgage.
Make biweekly mortgage payments
If seeing that big chunk of money leave your bank account at the beginning of every month is just too much to bear, try your hand at making biweekly payments. Besides breaking up the amount of money deducted from your bank account over the month, you receive the added benefit of making an extra payment each year — since you’ll make a payment every other week for a total of 26 weeks, that works out to 13 full payments instead of the standard 12.
If you’re OK with making one big payment but still want to pay down your loan faster, take your monthly mortgage payment amount, divide it by 12 and add that amount to your mortgage payment every month.
Making extra payments also allows you to save thousands of dollars in interest. But before you begin making extra payments, be sure to verify whether your mortgage servicer charges any prepayment penalties.
Dedicate surprise windfalls to your mortgage
Any time you get some unexpected extra money, why not use it to pay down your mortgage? Whether it’s a performance bonus at work, a larger-than-usual income tax refund or a generous gift from a loved one, you can set aside those funds to more quickly chip away at your home loan. Be sure to communicate to your mortgage servicer that you’d like to apply any extra payments you make to your principal.
Recast your mortgage
Seeing that six-figure number attached to your debt load can be intimidating and stress-inducing. A way to reduce your overall home loan amount is to take advantage of a mortgage recasting, which is different from a mortgage refinance. When you recast your loan, you pay your lender a lump sum of money, which is then subtracted from your total mortgage balance. Lenders may require a minimum lump sum of $5,000 or $10,000.
Once the lender subtracts the lump sum from your principal amount, it will recalculate your monthly payment based on your lower remaining mortgage balance. That means you’ll have a lower monthly payment amount. Keep in mind your interest rate and loan term won’t change in a recasting. You’ll also have to pay a fee with a mortgage recast; check with your lender for more info.
Tighten up your overall budget
Conventional lenders try and keep borrowers’ mortgage payments between 28% and 31% of their gross monthly income (this is also known as the front-end debt-to-income ratio). For FHA lenders, that range is between 31% and 35%. It’s often recommended that back-end ratios — which include all debt payments — stay below 36% for conventional loans and 43% for FHA loans, though some exceptions to these thresholds may apply.
If you’re still feeling strained even after fitting within the above guidelines, then maybe your mortgage payment isn’t the problem — it could be your other monthly expenses.
Start by taking a look at all your expenses over a given month to see where you can possibly cut back, then set a budget to establish boundaries around your spending habits. For extra help, check out our roundup of the best budgeting apps for both Android and iPhone users.
Pick up a side hustle
Increase your monthly income by taking on a part-time job like driving for a ride-hailing company such as Lyft or Uber, or picking up a seasonal gig a department store. You could also raid your wardrobe for items to sell or provide tutoring services for students.
Dedicate the money you earn from your side hustle to paying down your mortgage principal every month, and watch your balance shrink faster. The median weekly earnings amount for part-timers was $281 during the third quarter of 2018, according to data from the U.S. Bureau of Labor Statistics. That’s more than $1,100 in a given four-week month and $14,000 annually.
On a 30-year, fixed-rate $200,000 mortgage with a 5% interest rate, dedicating an extra $1,100 to your mortgage payment every month would potentially reduce your loan term from 30 years to just under a decade.
Rent out a bedroom
Collect extra income by turning your guest room into a rental. You could possibly welcome in lease-based tenants or travelers looking for short-term lodging through sites such as Airbnb.
Before you start collecting rent, however, be sure to get a thorough understanding of the residential landlord-tenant laws in your state, county and city. You’ll also need to check with your homeowners insurance carrier to determine what additional coverage you’ll need for a rental arrangement.
If you’re conducting short-term rentals of your primary home on a regular basis, the Insurance Information Institute says you’ll need a separate business insurance policy; a standard home insurance policy won’t provide coverage for business-related activities in your home. For longer-term rentals of six months or more, you’ll need to purchase a landlord or rental property insurance policy.
Refinance your mortgage
Perhaps you’re in an adjustable-rate mortgage and nearing the end of your loan’s fixed-rate term. You might prefer to maintain stability with your loan, so refinancing into a fixed-rate mortgage would be a better option for your financial situation.
FHA borrowers could also benefit from a refinance if they want to stop paying annual mortgage insurance premiums. Most FHA loans require mortgage insurance premiums for the life of the loan, whereas conventional loans drop private mortgage insurance payments once the loan reaches an 80% loan-to-value ratio.
On the verge of default? Learn your options
Your home is collateral for your mortgage. If you’re having trouble upholding your end of the agreement, you could lose your home to foreclosure. To avoid this, it helps to be communicative and transparent with your mortgage servicer.
Borrowers typically have a 15-day grace period after their monthly due date to make their mortgage payment. After that point, late fees apply, and eventually your servicer reports late payments to the three major credit reporting bureaus: Equifax, Experian and TransUnion. Your lender could begin the foreclosure process if you’re more than 120 days behind on your payments.
If you’re already behind or on the verge of being late due to unforeseen circumstances, reach out to your lender to determine your options for getting or staying current on your mortgage. Below we highlight some potential solutions.
In a forbearance, mortgage payments are temporarily reduced or suspended to take some of the pressure off of borrowers who are experiencing a short-term financial hardship. This is similar to the process for federal student loan borrowers. After the forbearance term ends, regular monthly payments resume and the borrower must make additional partial payments or a lump sum payment to bring the loan current.
Forbearance is helpful for borrowers who have a temporary reduction in their income, like someone who is on short-term disability but expected to return to work, according to the Federal Trade Commission. If you’re simply in a home that’s unaffordable, forbearance won’t help you, the FTC says.
Another option is a loan modification, which involves restructuring your mortgage in one of the following ways, according to the Consumer Financial Protection Bureau (CFPB):
- Extending your loan term
- Lowering your interest rate
- Reducing your principal balance
Unlike a mortgage refinance, there are typically no closing costs with a loan modification. However, if you extend your loan term, expect to pay more in interest over the life of your loan.
If you’re only slightly behind on mortgage payments, the FTC recommends setting up a repayment plan with your lender. You’d be given a certain amount of time to get current on your loan and would catch up by adding a portion of the past-due amount to your regular monthly payment.
You could also reach out to your lender about a “reinstatement” option, in which you pay the total past-due amount and any additional fees in one lump sum by an agreed-upon deadline.