• Can’t Afford Your Mortgage Payments? Top 5 Ways To Reduce Your Monthly Payments

    1. Refinance

    Any time you change your mortgage amount or amortization period, it is considered refinancing. Although refinance mortgage rates are generally higher than the rates you would get if you were purchasing a home or if you were just switching your mortgage to a new bank, it is still sometimes worth it.

    Ideally, you want the refinance to coincide with the maturity date of your existing mortgage. If it does not coincide, then you might be subject to a penalty.

    If you are refinancing and keeping the business with your existing lender, they might waive the penalty and/or give you a “blended” rate. This is exactly what it sounds like: they take your existing rate, and blend it with today’s rates, and you receive a new rate on the whole amount somewhere in between.

    There are other lenders that will allow you to keep your existing mortgage with them and they just add a second component (not a second mortgage), with the additional amount at the new rate.

    Sometimes it is worth it to pay the penalty and move the business to a new lender.

    In any case, contact a mortgage broker in Hamilton that you trust to help you either negotiate with your existing lender, or find a better offer with a new lender. They will do all the shopping and calculating for you and we don’t charge for that.

    a. Consolidate unsecured debts

    Refinancing is a good tool to reduce your monthly payments. How? If you are having a hard time making ends meet at the end of the month, you can take some of that unsecured debt (cars, loans, credit cards) and pay them off with the refinance funds. This eliminates those payments so that you have one single payment, hopefully at a lower rate and a longer amortization. This will usually give you some breathing room.  

    b. Extend your amortization

    If you don’t have any significant other monthly payments, and you are just struggling with your mortgage payments, then you can refinance by increasing your amortization period. This does not involve increasing the amount you are borrowing. You are not borrowing any additional funds in this case. You are merely stretching out the length of your mortgage. By changing the agreement to pay it off over a longer period of time, you thereby reduce the monthly payments. Generally speaking, new mortgages are amortized over a period of 25 to 30 years. There are some banks that will go as high as 40 years. Putting your mortgage on track to be paid off in 40 years will have a large impact on the size of the mortgage payments. Remember 2 things: the amortization period is very different from the term. The term is how long you have agreed to pay a certain rate (usually 2-5 year chunks). The amortization period is the projected length of time that it will take to pay the mortgage off to $0. Some clients prioritize paying off their mortgage quickly (i.e. reducing the amortization period as much as possible). This can be expensive, but if they can afford it, and that is their goal, then we salute them. For others, it is a matter of survival. They can’t afford to pay it off quickly, it’s still cheaper than rent, they are looking at the long term benefits of home ownership and appreciation, and they understand this is a short term solution. They may refinance in 5 years from now and reduce the amortization to 15 years because they are in a position to afford it now.

    2. Get A Reverse Mortgage

    A reverse mortgage is generally seen as a toxic term for many of our clients. The term reverse mortgage invokes fears of the bank owning the home and taking it away, leaving nothing for anyone to inherit, or worse, leaving the homeowner homeless. This perception could not be further from the truth. A reverse mortgage is exactly like a traditional mortgage except for one thing: the mortgage payments are deferred. Think of it like this: instead of making a mortgage payment every month, you say to the lender, “put it on my tab, I will pay at the end”. So yes, the payments do accumulate over time, but so hopefully will the value of the home. In the case of a reverse mortgage, the bank is taking a bigger risk, so they charge a slightly higher rate than a traditional mortgage. What is their risk? They have to wait sometimes 20-30 years before they recover their investment. They risk the fluctuations in house prices. This is why they put a limit on the percentage of the home value that you can borrow. This protects the homeowner AND the bank. By lending a maximum of 55% of the value of the home, they build in a buffer of market fluctuations.

    If you cannot afford your monthly mortgage payments, and you can qualify for a reverse mortgage (it’s not easy to qualify – you need to have excellent credit, have enough income to pay your living expenses, and your home needs to be worth at least double what your mortgage is), then this is an excellent option. It is probably the best option in my professional opinion. Your mortgage payments disappear almost overnight. And best of all, you don’t even need to let the payments accumulate. If you would like to make the payments and you can afford it, you can pay them and keep the mortgage balance constant. But now you have the freedom to revert back to no payments so that you can live a comfortable life. Will they take your home? No – they have just as much right to take your home as any mortgage lender. If you don’t make your mortgage payments with a traditional lender, they will come after your home. If you don’t make your payments with a reverse mortgage lender, they do nothing because it is designed to function that way! The only thing you need to do is keep fire insurance on the house and keep your property taxes up to date.

    3. Get A Private 2nd Mortgage

    This is sometimes a good option when the terms of your existing 1st mortgage are too appealing to break or when the penalty to break the first mortgage is too high. If you have enough equity in your home, you can get a second mortgage to consolidate your other unsecured debts and/or help you make the payments on your first mortgage. But the absolute most important point when considering a 2nd mortgage is: What is the exit strategy? 2ndmortgages should be short term. They need to solve a problem, with a clear plan to get out in 1-2 years max. 2nd mortgages are expensive. They come with high rates and high fees. But if you need $50K to solve a short term problem, and your existing mortgage has a balance of $500K @ 1.5% with a $30K penalty if you break it and the rate will jump to 4% if you break it, it’s probably better to just eat the cost on the smaller amount.

    4. Change Your Payment Frequency

    This can have some small affect on your payments. If when you signed up for the mortgage, your objective was to pay it off quickly, you may have chose accelerated payments. Accelerated payments mean that you are paying more than you actually have to, to meet the agreed amortization period. In other words, by making accelerated payments, you have voluntarily reduced your amortization period. You can revert back to the original amortization period by paying non-accelerated payments. This will reduce your payments slightly, but it may be enough.

    5. Sell

    The last resort is, of course, to sell. Sometimes it is necessary when the fees on a second mortgage don’t make sense, or there is no exit strategy. Some clients will sell and use some of the proceeds to pay off unsecured debts like credit cards and personal loans. The danger of selling is that you are going to pay a commission to a realtor, and if you want to get back into the market at a future date, the homes may be unaffordable at that time. But it could go the other way. You could cut your losses and wait for the market to drop: sell high, buy low, so to speak. It is tough to time the market. The other consideration is where will you live in the meantime? Consider the cost to rent a home that you don’t own. At least when you owned the home, you were paying down the mortgage and hopefully appreciating at the same time, thereby building equity. Some clients will keep this in mind and downsize – sell and buy right away. Sometimes this is also not possible because it requires moving to a different location to find a cheaper place.

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