One reason that people end up in the foreclosure process is because they did not understand some important things about their mortgage. It is important to understand the terms of any loan that you have, but especially one that is connected to your mortgage. Knowing the following 6 things can help you avoid having your house foreclosed on.
1) What type of mortgage do you have?
Mortgage lenders are known for selling their loans to each other. Your loan could change hands between lenders several times while you have your mortgage. Always know who your loan is with because you need to be able to contact your lender if you are having problems making your payment.
If you have a government issued loan, such as one with Fannie Mae, Freddie Mac or an FHA loan, they are required to make you aware of your options. They want to work with you to help you avoid going through the foreclosure process. If you don’t know the answer to what type of loan you have, check your loan documents.
2) What repayment terms do you have?
Knowing the terms of your repayment is crucial to getting a mortgage. You need to know if your loan has an adjustable rate or a fixed rate, and how many years you have to pay on it. If you have a loan with a balloon payment at the end, you need to be ready to make that payment when the time comes.
3) Is there a prepayment penalty?
Prepayment penalties apply on some loans even if you are just refinancing your loan. The fees can add up quickly if you refinance multiple times to take advantage of better rates or to access the equity you have built up in the home.
4) How does your rate adjust?
Adjustable rate loans are not all the same. Some will change their interest rate every single month. Others will have a fixed rate for a set number of years in the beginning and then start adjusting after that. If you have an ARM, you need to be ready to pay each month regardless of what the market is doing.
5) Terms of an Option ARM
If you have an Option ARM, which allows you to make an interest-only minimum payment, pay attention to how much interest you are tacking onto your mortgage balance by using that option. You may eventually end up with a payment you can no longer afford.
6) What about the three D’s?
Unfortunately, the majority of foreclosures happen because of death, disability, or divorce. What’s your plan in the event that your household experiences one of them? Life insurance and disability insurance can help cover the mortgage. Be prepared.
Foreclosure is something that can be avoided by understanding these things. Being prepared is always the best option. If you find yourself in a situation where you can’t pay your mortgage, always communicate with your lender right away. They do not want to go through the foreclosure process either, so talk to them about what other alternatives exist.