The government's mortgage forbearance program — recently extended by President Joe Biden — is letting millions of struggling homeowners put their mortgages on hold through the pandemic. But is that the best option if you're straining to make your payments?
You can use forbearance to stop paying for up to 18 months, but you’ll still owe your lender the money. The deferred payments might have to be tacked on at the end of your mortgage term, or due as a lump sum when your home is resold or refinanced.
If that doesn't sound very appealing, here are three ways you might reduce your mortgage payments so you can keep making them — instead of just kicking that can down the road.
1. Ask your lender for a lower rate
Many mortgage lenders will give you a lower rate if you just request one.
Don't expect your loan servicer to reach out and offer you a reduced rate. Rather, it's something you’ll have to ask for, like items from the "secret" Starbucks menu. As with the "shortbread cookie Frappucino," if you know how to make your request you might be pleasantly surprised with what you get.
Mortgage interest rates remain near all-time lows, and in this case the economic uncertainty of the pandemic works in your favor: Your lender likely won't want to lose your account and could be open to lowering your rate to make your loan payments more affordable.
If your mortgage is currently in good standing with your lender and is a loan on your main residence (not a vacation home), then you could find yourself with a lower mortgage rate just for the asking.
2. Refinance to a cheaper loan
Mortgage rates have fallen so far during the COVID era that you might seriously mow down your monthly house payment by refinancing to a new loan with a lower rate.
Rates are still down substantially from where they were in late 2019, when 30-year fixed-rate mortgages were averaging around 3.75%. They're so low that 16.7 million U.S. homeowners could save an average $303 per month by refinancing, the mortgage data and technology provider Black Knight recently reported.
You're considered a good refi candidate if: you could cut your rate by at least three-quarters of a percentage point (like, from 3.75% down to 3.0%); you own at least 20% of your home, through your equity; and you've got a strong credit score. If you're not sure about your credit score, you can easily check it for free.
But refinancing isn't free. Same as when you took out your existing loan, you'll have to pay closing costs — and they can run anywhere from 2% to 5% of your loan amount, with the national average about $5,000, according to mortgage company Freddie Mac.
Some of the fees are negotiable, and this is another of those occasions when it pays not to be shy. Ask your refi lender if you can get a break on closing costs — and you might be pleasantly surprised.
3. Request a loan modification
And here's one more time when being proactive and speaking up can shave some money off your mortgage costs. (You don't get anything if you just sit there quietly.)
You can lower your monthly payment by asking for a mortgage modification, which would allow you to keep the loan you already have — but with updated terms.
If your lender or servicer is agreeable, a mortgage mod could adjust one of the key components of your mortgage so you'll be able to keep making your payments. You might come away with a lower interest rate, a smaller monthly payment amount, or even a reduction in the remaining balance of your loan.
As with refinancing, a mortgage modification comes with expenses, including filing or administrative fees. If you’re choosing between this option and refinancing, make sure you weigh the costs to determine which path makes the most financial sense for you.
And whichever way you decide to go, take advantage of other ways to cut your housing costs. Shop around for cheaper home insurance, and you may find the coverage you need but at a price far below what you're currently paying.