Can I refinance if I used Mortgage Forbearance?
If you put your mortgage forbearance during the first wave of COVID-19, chances are you'll be thinking about what's next once your payments resume.
With mortgage rates at historic lows, you may want to refinance to reduce your monthly payments and make your loan more manageable.
The good news is that leniency refinancing is generally allowed. However, there are special rules to be observed.
Here's what you need to know:
Check your refinancing eligibility (October 19, 2020)
Is now a good time to refinance?
For those who are eligible, it is a good time to get refinance.
Data firm Black Knight recently found that refinancing could save 2.5 million homeowners $ 500 a month or more. And millions more could cut their payments by at least $ 299.
This is because mortgage rates hit ten record lows in 2020, opening the door to significant savings.
If your creditworthiness and income have improved since you first took out your mortgage, you may qualify for a much better interest rate than you received on the original loan.
That said, you could save money on interest and have more cash available every month.
If you come out of your indulgence and are concerned that you will be able to afford your payments after they resume, mortgage refinance can also make the transition easier and help you keep your finances stable.
Check your refinancing eligibility (October 19, 2020)
How soon can I get refinance after the Forbearance ends?
Your refinancing schedule will depend on the type of mortgage you have.
If you have a conventional loan backed by Fannie Mae or Freddie Mac, you must make three consecutive payments after the forbearance ends before you are eligible for refinance.
Prior to COVID-19, homeowners had to wait 12 months of indulgence before applying for refinance. The revised rules allow borrowers who faced financial problems during the pandemic to access lower interest rates, which will provide further economic relief.
However, other terms may apply if you have a federally secured loan, including FHA, VA, and USDA mortgages.
Borrowers with FHA mortgages are not required to make a lump sum after the forbearance. Instead, lenders can give these borrowers a second lien that they will repay when they sell the home or when they refinance Consumer Financial Protection Bureau (CFPB)Forbearance, VA borrowers may be eligible for a loan modification planUSDA borrowers may be entitled to have their back payments added to the end of their loans
If you have one of these loans, the best thing to do is to contact your lender and ask what options you have and when to apply for refinancing.
How to Refinance Indulgence
There are several steps to take if you believe an Forbearance Refinance is the right decision for you:
1. Check your options with your current lender.
Your loan servicer can help you determine whether refinancing makes the most sense for you, especially given the closing costs and other fees.
If your finances are still tight, they may be able to revise your repayment plan or reduce your monthly payments on your current loan.
2. Compare the refinancing offers
If you decide to refinance, get quotes from several different lenders. It is always important to compare interest rates, terms and total costs to determine who is offering you the best loan deal.
Compare refinancing offers (October 19, 2020)
3. Make sure that you can afford the new loan
Before committing to anything, you want to find out how much you are paying each month and whether you can afford a new loan.
You can use a mortgage refinance calculator to compare your current loan and interest rate to a new one to ensure that you can save money and afford the new payments over the long term.
4. Apply for refinancing
When you have decided on a lender and you are sure that you can handle the new loan, fill out your refinancing application.
It's a good idea to prepay minor debts and make sure all of your credit card and other credit accounts are up to date before making an application.
The better your credit, the better your chances of getting approved and getting a low interest rate.
Is Refinancing the Right Step for You?
Leaving mortgage forbearance can be a financial challenge, especially if you're still catching up after a layoff or a decrease in your income.
Refinancing your home can ease the burden of rebuilding your finances and give you some respite as you find your way through the ongoing uncertainty of the pandemic.
Lower monthly payments mean more cash for an emergency fund or unexpected expenses. Also, if you don't have a lot of cash, you may be able to include your closing costs in the loan, which lowers the barrier to entry.
However, refinancing is not suitable for everyone.
If you feel like you are still on shaky ground due to the pandemic, you should consider getting an indulgence extension or other repayment options through your lender.
The strongest refinancing candidates also have strong credit and at least 20% equity in their homes. So consider your entire financial profile.
If you recently bought the house with a small down payment, or your credit took a hit during COVID, it may be better to focus on getting your score up and getting more equity before trying to get a new loan.
Other options after the end of indulgence
Refinancing isn't your only option. Here are some ways you can approach the End of Forbearance:
Resume payments at the original rate. When you are confident that you can make your mortgage payments in full, you can pick up where you left off by paying the same monthly amount. However, you also need to make arrangements to cover the payments that you missed while on the forbearance. You may be able to spread this over the next year or extend the repayment period for your loan so that you don't have to apply for the back payments as a lump sum for an extension. You can apply for a six-month indulgence extension if you are still having financial problems and cannot yet afford to resume your mortgage paymentsSell the house and pay off the loan. Perhaps months of quarantine and work from home have been thinking about moving to a city with a lower cost of living. Selling your home to pay off your mortgage can free up cash to move and buy a cheaper home at a lower interest rateRefinance your mortgage. Refinancing allows you to stay at home and get your mortgage payments back on track, but at a potentially lower interest rate. Not only will a lower rate save you money, but it will likely extend the repayment period, resulting in lower monthly payments
The right decision for you will depend on your current loan and what your finances are when you end the COVID mortgage forbearance.
Your loan servicer should walk you through all of the options before the forbearance ends so you can be sure you are making the best choice for your mortgage recovery.
Refinance rates should stay low so you don't have to refinance now
The good news is that refinancing rates are likely to remain low for the next few years. So you won't necessarily miss out while waiting for your application.
Focus on doing the next best step for you when it comes to your indulgence – whether this is a refinance or not – instead of knowing what the interest rates are today and what other homeowners are doing with their mortgages.
Check your new plan (October 19, 2020)