During times of Economic crisis you may have to rethink your finances, this might include your mortgage
Sometimes life gets in the way, and you start to fall behind in your financial commitments, including mortgage — haven’t we all experienced it?
At such time, one question that will be running through your mind is whether to downscale or not? Before you decide what to do with your mortgage, it would be best to understand what a mortgage is and how it works. This way, you will be able to make a better and well-informed decision.
So, first things first, what is a mortgage, and how does it work?
You will agree that buying a home is one of the best feelings and achievements in life and everyone would love to have a taste of it. However, what happens when you find your dream house, but your pockets are not deep enough to purchase it? Do you walk past and let it go or you go all out to get it?
Now, that is what mortgage is all about. You can purchase a property or land on a mortgage and pay back later based on an agreed payment plan between you and a lender, often a bank.
If you are new around the block, you can think of a mortgage as a loan taken to purchase a property or land; mortgages run for up to twenty-five years. However, the term of the loan can be shorter or longer and secured against the home’s value until you can complete payment.
Suppose you fall behind in your mortgage payment or you can no longer afford the mortgage. In that case, the lender can take action and initiate steps to repossess or take back the property and sell it a capable buyer and recoup their money. Having mentioned that, you should always remember not to overstretch yourself when signing off on mortgages.
Working out a mortgage you can afford
As we mentioned earlier, you should always be careful not to overstretch yourself when taking out loans to purchase a property or land. You will end up struggling to keep up with the payments, and if you cannot complete the payment, you will most likely lose the house.
So, before you enter into any mortgage agreement, it is always best to consider the running costs of owning a home — insurance, tax, household bills, and course maintenance.
Lenders will ask to see proof of your income and expenditures to see if you can afford the mortgage or not and they will also assess your debt history — if you have a history of not repaying debts.
You should also expect questions about your personal expenses, child maintenance and household bills. All of these are to ensure that you can keep up with the repayments if interest rates rise. While you are at it, you should have it at the back of your mind that, the lender may reject your mortgage application if the lender thinks you cannot afford it.
Where can you get a mortgage?
As you can imagine, you can get a mortgage from a bank or building society around where you live. To help you make the right choice of mortgage, it would help if you employed the services of a mortgage broker or an independent financial adviser who will scout the market for mortgage offers you can afford.
Unless you are an expert in financial matters (especially on mortgages), you should have an expert advise you about your mortgage to save you from making costly mistakes with your mortgage.
Some critical questions you should ask yourself before taking any mortgage deal are:
1. What type of mortgage are you going for?
2. What type of property do you want to buy
3. How much mortgage or loan are you taking and for how long
4. What is the interest rate on loan?
Suppose you are taking a mortgage without professional advice. In that case, the lender will document it, and in most cases, you will be asked to confirm that you are aware of the consequences of taking a mortgage without advice and still want to continue with the mortgage. This is the lender giving you a second chance to reconsider your mortgage choice and double-check to see if you can afford the mortgage.
How does a mortgage work?
As you may already know, the idea of mortgages is to help you purchase a property (a house) on loan, and full ownership will be transferred to you by the lender when you complete payment.
To understand how mortgages work, you should be able to differentiate between the different types of mortgages. The type of mortgage you can apply for depends on whether you are repaying only the interest or both the interest and principal.
Have you heard about repayment mortgages?
In repayment mortgages, you will have to pay the interest and the principal or capital every month over the mortgage term. So, at the end of the term (which is typically 25 years), you must have paid off all the loan and take full ownership of your home.
Another type of mortgage is the interest-only mortgage.
What is an interest-only mortgage?
If you sign off on an interest-only mortgage, it means you will be paying only the interest on the loan and nothing off the original amount you borrowed.
You will have a separate plan for repaying the original loan at the end of the loan term. This type of mortgage is becoming rare and even more challenging to get because it leaves homeowners in colossal debt and often with no way of repaying.
Hopefully, all we have disused so far will have given insight into what to look out for while making your mortgage plan choice.
While you are it, have it mind that a mortgage is a type of loan intended to help you finance a property — making it a secured loan. Also, keep in mind that a mortgage is a type of loan, and not all loans are mortgages.
What are your options if you cannot afford to pay your mortgage loan?
If you are falling behind in your mortgage or are worried that you cannot continue payment or cannot afford your mortgage, the best thing to do is contact your mortgage servicer for expert assistance to avoid foreclosure.
Call your mortgage servicer
Usually, when you make your monthly payment, your mortgage servicer’s telephone number should be printed on your mortgage statement. If you don’t get monthly statements, you can get their number from coupons or website.
When you get hold of them, you should be prepared to explain why you cannot continue with payment, whether the financial setback is temporary or permanent, and provide details about your income and expenses. Ideally, most mortgage servicers will attempt to proffer solutions to avoid foreclosure. They will let you know what options are available to you and let you know how they can assist.
What options might be available if you cannot afford to pay your mortgage?
Having discussed with your mortgage servicer or lender, some options that may be available to you available if you cannot afford to pay your mortgage includes:
- Refinance
- You may have to work out a repayment plan
- Get a loan modification
- Get forbearance
- Short-sell your home or
- Forfeit ownership to the lender by forfeiture
I cannot afford to pay your mortgage. Is it time to downscale?
Not being able to afford your mortgage could be a sign that you need to cut down on your expenses and spend your money on essential things. You should approach the situation with an open mind and do what is right considering your situation.
If you cannot afford your mortgage, it means you cannot afford your home and cannot keep up with the running costs of owning a house. And it could allude to the possibility of not being able to meet your financial obligations.
Some options you could consider include selling the property if it’s too expensive and buying a cheaper one or consider renting out the property for a while.
Pinpoint your financial problems and take action
Having pinpointed the problem; whether it’s a cash flow problem or cash management problem (in other words, are you overspending or under-earning), you shouldn’t hesitate to take the necessary steps to deal with the situation.
If keeping your home is hurting your pockets, you shouldn’t hold on to it because living in a house you can’t afford can be stressful. It may not be easy, but you have to be brave to pull through the emotional hurdles that come with downscaling because you cannot afford your mortgage. Lastly, don’t rope yourself into thinking that not being able to afford your mortgage is a sign of financial failure.
Final thoughts!
Most people regard downscaling as a financial failure and do nothing until the situation gets worse. It would be best if you didn’t go down that route. If downscaling is the right thing to do at the time, it will be best to take it and move on.
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