Most people take out a mortgage when they buy a house. You probably have a 30 year mortgage, although some mortgages run for shorter term such as 15 years. When you make a mortgage payment, you are likely to be paying for other costs as well, like interest, taxes and insurance. If you have missed a mortgage payment and you are facing foreclosure, it is important to understand your mortgage debt.
The Mortgage Payment
A monthly mortgage payment is the most common, although some people opt to pay twice each month to pay off the mortgage sooner. Your mortgage payment will include charges such as principal, interest, taxes and insurance, sometimes referred to as PITI. The bank may also require you to have PMI (Private Mortgage Insurance) that will show up on your mortgage payment as well. Some types of mortgages have the same interest rate for the entire term of the loan, while others have a fluctuating rate so your monthly payment can escalate.
- Principal and Interest
Your payment is divided into the principal, which is the original amount of the mortgage loan, and the interest on the loan. When you start to make payments, most of the payment will go toward the interest. As you make payments over time, you pay a greater percentage toward the principal. You can find out from the bank how much you still owe on your mortgage loan at any given time. The term amortization refers to reducing the debt through regular payments against the principal
- Tax and Insurance
Your monthly payment is also likely to include property tax as well as homeowners insurance. For borrowers who put down a small down payment under 20 percent, the lender may require Private Mortgage Insurance. The PMI payments will also be included in the mortgage payment.
- Escrow
The bank puts money for expenses like taxes, interest and insurance in a special account called an escrow account. The bank then pays the amounts due from that account. Your bank is likely to ask you for money to put into the escrow account at the start of the loan. Sometimes they ask for additional funds over the course of the loan to cover costs, especially if there is a tax hike or if insurance rate increase.
- Other Expenses
You might also be liable for Homeowner Association or Condo Association fees, depending on the type of community you live in. These fees may be paid directly, or they may be paid through your lender along with the mortgage payment.
Types of Mortgages
There are several types of mortgages, and if you are facing foreclosure you should understand which type you have.
- The Fixed-Rate Mortgage
With a fixed-rate mortgage, your interest rate stays the same over the entire term of the loan. A fixed-rate loan is usually for 30, 20 or 15 years. The amount you pay monthly remains stable, unless your tax or insurance rates go up.
- The Adjustable Rate Mortgage (ARM)
Many people who have an ARM where their monthly mortgage payments keep going up find themselves facing foreclosure as the mortgage payments become unaffordable. With an Adjustable Rate Mortgage, the interest rate may stay the same for a period of time and then fluctuate according to market conditions. Some ARM’s cap the amount that your interest rate can increase.
- The Conventional Mortgage
A conventional mortgage is not insured by the government. A conforming conventional mortgage has a loan amount falling within the limits set by Fannie Mae or Freddie Mac, while a jumbo loan does not meet these limits. Jumbo loans require in-depth documentation and are more common in areas where real estate costs are high.
- The Government-Insured Mortgage
There are several types of mortgage loans that are backed by a government agency. These loans help buyers who do not qualify for a conventional loan, they do not have a large down payment and may have less than stellar credit.
- FHA Loan
The Federal Housing Administration (FHA) allows a buyer who does not have pristine credit or a large amount of money for a down payment to become a homeowner. Buyers need to meet FICO credit score qualifications for an FHA mortgage.
- VA Loan
The Veteran’s Administration (VA) loan for veterans and their families does not require a down payment and closing costs are capped. The funding fee on a VA loan is generally rolled into the loan. There is no PMI required for a VA loan.
If you Miss a Payment
The moment you miss a mortgage payment, even if it is by one day, your mortgage goes into delinquency. At this point, the lender is likely to give you time to make the payment, typically 15 or 30 days. After that, the credit bureaus are notified, but you can work to get back your good credit score by making on time, regular mortgage payments going forward.
However, if you are late with your mortgage payment by more than 30 days, you are considered in default. At this point you are likely to receive notification that the bank is planning foreclosure proceedings. In the state of New York, the lender can start foreclosure 90 days after notifying you of their intent.
Are you Underwater?
You may want to sell your house and move somewhere more affordable, but this course of action may not be so easy if you are “underwater” on your house. If the real estate market dropped and you will not recoup enough money to pay off your mortgage when you sell, you have a problem.
To find out if you are underwater, ask the bank how much you still owe on your mortgage. Then have a real estate agent or appraiser help you determine how much you are likely to get if you sell your home at today’s market prices. So, for example, if your home is worth only $400,000 and you still owe the bank $500,000, you are underwater by $100,000.
What you Can Do when Facing Foreclosure
Your bank will expect you to take steps to avoid foreclosure during the 90 days after a foreclosure letter. This is the time to explore alternatives. While you may think that a loan modification will lower your monthly payments to allow you to stay in the home, unfortunately that is not always the case. You may also end up with a bad deal where you are asked to pay far more than your house is worth. For many people facing foreclosure, a short sale is the best option. If the bank agrees you can sell your home for less than you owe, the bank takes the loss and you move on to a more affordable home.
Getting the Advice you Need
Realty Warehouse can help if you are facing foreclosure and you live on Long Island or in the five boroughs of New York City. Our representatives help homeowners weigh their options in order to find alternatives to foreclosure such as a short sale and achieve the best possible outcome. Realty Warehouse enjoys an A+ accreditation rating from the respected Better Business Bureau. You can count on us to listen to your situation, offer the advice you need and provide effective alternatives in a stressful situation.
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This blog is for informational purposes only, subject to change.