When you apply for a mortgage or refinance an existing mortgage, you want to secure the lowest interest rate possible. Any opportunity a borrower can exploit to shave dollars off the cost is a big win.
This explains the allure of no-fee mortgages. These home loans and their promise of doing away with pesky fees always sound appealing—a lack of lender fees or closing costs is sweet music to a borrower’s ears.
However, they come with their own set of pros and cons.
No-fee mortgages have experienced a renaissance given the current economic climate, according to Ralph DiBugnara, president of Home Qualified. “No-fee programs are popular among those looking to refinance … [and] first-time home buyers [have] also increased as far as interest” goes.
Be prepared for a higher interest rate
But nothing is truly free, and this maxim applies to no-fee mortgages as well. They almost always carry a higher interest rate.
“Over time, paying more interest will be significantly more expensive than paying fees upfront,” says DiBugnara. “If no-cost is the offer, the first question that should be asked is, ‘What is my rate if I pay the fees?’”
“Closing costs are typically 2% to 5% of the loan amount,” he explains. “On a $200,000 loan, you can expect to pay approximately $7,500 in lender fees. Let’s say the interest rate is 4%, and a no-fee mortgage has a rate of 4.5%. [By securing a regular loan], you will save over $13,000 over the course of the loan.”
So while you’ll have saved $7,500 in the short term, over the long term you’ll wind up paying more due to a higher interest rate. Weigh it out with your financial situation.
Consider the life of the loan
And before you start calculating the money that you think you might save with a no-fee mortgage, consider your long-term financial strategy.
“No-fee mortgage options should only be used when a short-term loan is absolutely necessary. I don’t think it’s a good strategy for coping with COVID-19-related issues,” says Jack Choros of CPI Inflation Calculator.
A no-fee mortgage may be a smart tactic if you don’t plan to stay in one place for a long time or plan to refinance quickly.
“If I am looking to move in a year or two, or think rates might be lower and I might refinance again, then I want to minimize my costs,” says Matt Hackett, operations manager at EquityNow. But “if I think I am going to be in the loan for 10 years, then I want to pay more upfront for a lower rate.”
What additional fees should you be prepared to pay?
As with any large purchase, whether it’s a car or computer, there’s no flat “this is it” price. Hidden costs always lurk in the fine print.
“Most of the time, the cost for credit reports, recording fees, and flood-service fee are not included in a no-fee promise, but they are minimal,” says DiBugnara. “Also, the appraisal will always be paid by the consumer. They are considered a third-party vendor, and they have to be paid separately.”
“All other costs such as property taxes, home appraisal, homeowners insurance, and private mortgage insurance will all still be paid by the borrower,” adds Yates.
It’s important to ask what additional fees are required, as it varies from lender to lender, and state to state. The last thing you want is a huge surprise.
“Deposits that are required to set up your escrow account, such as flood insurance, homeowners insurance, and property taxes, are normally paid at closing,” says Jerry Elinger, mortgage production manager at Silverton Mortgage in Atlanta. “Most fees, however, will be able to be covered by rolling them into the cost of the loan or paying a higher interest rate.”
When does a no-fee mortgage make sense?
For borrowers who want to save cash right now, but don’t mind paying more over a long time frame, a no-fee mortgage could be the right fit.
“If your plan is long-term, it will almost always make more sense to pay the closing costs and take a lower rate,” says DiBugnara. “If your plan is short-term, then no closing costs and paying more interest over a short period of time will be more cost-effective.”
Delivery workers at restaurants, grocery stores, and other essential businesses provide a lifeline to homebound shoppers while the highly infectious and deadly coronavirus circulates, so you might be wondering: When do I need to leave a tip? And how much gratuity is enough?
From curbside pickup to alcohol delivery, there are many services that could warrant a tip, but the etiquette on tipping during a pandemic isn’t obvious.
So, what does “generous” mean in dollars and cents? Follow these pointers to avoid an etiquette error the next time you go to leave a tip.
1. Always tip for delivery and takeout/curbside pickup
Whether you’re getting Mexican food delivered for Taco Tuesday or placing an order for delivery from your local cannabis dispensary, right now you should tip at least 15% to 20%, Gottsman says. The same goes for grocery or alcohol delivery.
If you’re picking up from a restaurant that started offering curbside pickup in the wake of the pandemic, leave a tip.
“The people that are outside are probably employees they’re trying to save from losing their job,” Gottsman says. “They’re probably working for gratuity but not a large hourly rate.”
But just how much should you tip for curbside or in-store pickup? That depends. While some etiquette experts suggest tipping the same 15% to 20% that you would tip for delivery, others say it’s OK to go lower.
“There is a difference between curbside pickup and actual delivery, and for delivery there’s more involved,” says Elaine Swann, a lifestyle and etiquette expert. “Anyone coming to your front door should get a little more money.”
Still, Swann suggests tipping at least 10% on pickup orders during a pandemic.
When it comes to grocery pickup, the etiquette is a bit more complicated.
“Grocers normally don’t allow their people to take tips; although in this scenario, they might have altered their policy,” Gottsman says. If you want to tip the curbside pickup person at your grocery store, ask first if a gratuity can be accepted.
Most of us aren’t in the habit of tipping drive-up window workers at fast-food restaurants, and that’s still OK, Gottsman says—those workers earn an hourly rate, and staffing the drive-up window is part of their regular job duties.
2. Tip just as generously regardless of who delivers
Whether you order your lunch directly from a restaurant or through a third-party delivery service like Grubhub or DoorDash, you should tip the delivery driver the same amount.
Gottsman suggests at least 15% to 20% here, too—although you might have noticed some delivery apps have a default tip set to 25%. If you’re able to swing it, it’s a nice way to thank the person facing the health risk to deliver essentials to you.
“Whether you’re ordering through a third-party service or the restaurant itself, the tip is intended for the person delivering it to you, so I think they should be treated equally,” Swann says.
Even if you have to pay extra for delivery through a third-party service, service fees shouldn’t cut into your tip. On that note …
3. A service or delivery fee is not a tip
When you see a delivery fee or service charge on your order total, that money doesn’t go to your driver—so don’t use it as an excuse to pinch pennies with the tip.
“A delivery fee covers other costs for the restaurant,” Gottsman says. “It’s really important not to confuse a delivery fee with a gratuity. They are two different things.”
4. Some workers can’t accept tips, but you can still offer a kind gesture
“What you could do for somebody you appreciate is leave a nice candy in the mailbox or a gift card for a cup of coffee,” Gottsman says.
What about your local boutique that’s started delivering home goods, or the pet supply store that’s delivering dog food? Many small retail businesses don’t expect tips, Swann says, but now is a great time to show gratitude by posting a glowing review online.
“Not only should we be patronizing our businesses, but we should be putting forth an effort to highlight our positive experiences,” she says. “If they can get that virtual high-five during this time, that would be very helpful.”
5. Be cautious with cash
For online or phone orders, you’ll likely add the tip when you provide your credit card information. But what about cash tips at a time when we’re all trying to eliminate unnecessary physical contact?
“If you do have to tip in cash, to put [workers] at ease, put the cash in an envelope in advance,” Swann says. “One of the core values of etiquette is to make sure we’re doing everything we can to put others at ease.”
And of course, if cash changes hands, sanitize or wash your hands before and after the interaction and follow Centers for Disease Control guidelines for maintaining safe social distance.
6. Tip on the total, not the subtotal
It’s the perennial debate: Should you tip on the subtotal before tax, or the total after tax?
“Just tip on the whole thing,” Gottsman says. As essential workers gear up in masks and gloves and take extra precautions to deliver food and necessities so the rest of us can stay home, now isn’t the time to be stingy.
“Do those few pennies matter? I think they matter to that person [you’re tipping],” she says.
7. Consider tipping contractors, fitness instructors, and others who go above and beyond
You probably wouldn’t normally tip a plumber or electrician who comes into your home, but if you can afford it, it’s not a bad idea, Gottsman says.
“If they come out in the middle of the night or they come out all masked and covered up, you might offer to give them some extra gratuity,” she says. “More than likely they will take it. … They aren’t having the businesses they normally have.”
If your favorite trainer or fitness instructor offers free workout plans or streaming classes while gyms are closed, you may also want to send them a tip on Venmo or PayPal.
“If they’re not charging you but just doing it to keep you going, then why not go ahead and send them a little something?” Swann asks.
8. When in doubt, just do what you can
This is a tough financial time for many people. If tipping above and beyond your normal amount feels out of reach, don’t beat yourself up—just do what’s in your budget.
“The bottom line is, we give what we can afford at this time,” Gottsman says. “Some people are not impacted at all financially, and some people don’t have jobs. To say across the board that everyone should tip more would be unfair.”
During the current financial crisis, you may ponder the idea of simply stopping payment on your mortgage. It is an option that some may want to consider in difficult times, but it is a bad decision all the way around.
The reason: It will affect your credit for years to come and is likely to result in the loss of your home. As a topper, the bank doesn’t really want your house. Lenders are willing to help and would rather not foreclose.
So don’t adopt the tactic of pooh-poohing your payment and hoping for the best.
According to the Mortgage Bankers Association, almost 7% of all mortgage loans are currently in forbearance as of April 19. That’s up from just under 6% the week before. To give some perspective, at the beginning of March, the number was just 0.25%.
While some mortgage holders are asking for help, the temptation not to pay is real. Let’s reiterate: It is a bad idea.
What happens if I don’t pay my mortgage?
If you don’t pay your mortgage, it will set you on the path to foreclosure, which means losing your house.
A mortgage is a legal agreement in which you agree to pay a certain amount to a lender for a certain number of years. Failing to pay violates that agreement.
Right now, federal (and some state) foreclosure proceedings are paused, but they will resume as soon as the economy begins to open up again. In some states, that may be imminent. The idea behind the pause was to ensure that people made it through the shelter-in-place orders with a place to shelter.
“This is not a moratorium that [lenders] will never foreclose again,” says Mary Bell Carlson, an accredited financial counselor known as Chief Financial Mom.
“You need to take this seriously and not just stop paying. Because if you stop paying and it adds up, you’re going to be first on the list to foreclose on when the economy reopens.”
Consequences of missing payments
Mortgage payments are due the first of each month and are considered late after the 15th of the month. That’s when late fees, penalties, and correspondence from the loan servicer begin.
“First off, you’ll get a letter in the mail from your servicer which says you owe x amount and it must be paid by this date,” Carlson says. The letters will outline any penalties and late fees and will often include an offer of help.
“The bank is not in the business of owning homes—that’s not what they want to do,” she says. “They’re not looking to take over your house.”
She adds that lenders want to work out solutions to keep you in your house and avoid lengthy foreclosure proceedings.
Meanwhile, be wary if you receive a call or an email from someone saying they’re your lender and you haven’t paid. It’s probably a scam, says Carlson. Your lender will send notifications via the postal service.
Will not paying my mortgage damage my credit score?
Your loan will go into default after 30 days of nonpayment. The mortgage servicer will probably file a notice of default with your local government and report the nonpayment to the credit bureaus, which will negatively impact your credit score.
“The credit is the first thing that gets hit. Your credit will take a nosedive if you stop paying your mortgage,” Carlson says.
“If you just close your eyes and stop paying, your credit is going to dissipate, and it takes years for those things to fall off.”
A low credit score may impact your future ability to get a mortgage or to rent.
“No one is going to want to rent to somebody who has just declared bankruptcy or has been foreclosed on, because that’s going to be a huge red flag,” Carlson warns.
As you continue to miss payments, penalties, interest, and correspondence from lenders will accumulate. Eventually, you’ll get a notification that the foreclosure process is underway.
How long will it be before foreclosure?
The foreclosure process is different in each state, so the process and its length may vary. Carlson says the process often begins in earnest after about six months of nonpayment.
She added that from the time of the first missed payment to about the six-month mark, lenders will work on solutions to avoid foreclosure. But if they don’t hear from you then, be prepared to lose your home.
“At the six-month point, they say, ‘OK, all options are off the table at this point. You’re unwilling to work with us, we’re going to start foreclosure,’” says Carlson.
When this happens, the entire loan becomes due and repayment plans are no longer an option.
The timeframe varies by state, but sometimes as quickly as six months after the first missed payment, a lender can list the home for sale or hold an auction. A homeowner will have to vacate.
The current economic climate is delaying foreclosures, but proceedings will resume once states begin to lift suspension orders.
What do I do if I’m struggling to pay my mortgage?
If you’re having difficulty making mortgage payments, there are options. Some will help keep you in your house, while others will protect some of your credit. But don’t bury your head in the sand and simply stop paying.
“Communicating with your lender is the key,” Carlson advises. “So if you cannot pay, the communication methods need to—and must be—open to communicate that to your lender and discuss the options you have.”
Here are a few of the common options if you want to stay in your home:
Forbearance: A lender allows a borrower to pause payments for a period of temporary hardship, sometimes waiving late fees or penalties. Interest will often still accrue. At the end of the forbearance period, the missed payments become due. Forbearance is a good option if the financial situation is a short-term setback.
Loan modification: Changing the terms of the loan and payments is possible. Often, this involves a divorce, job change, or an unexpected increase in expenses. Loan modifications are a tactic to deploy if you want to stay in your home, but can no longer afford the current payments.
Repayment plan: If you are a few payments behind and think you can catch up, one option might be a repayment plan allowing you to make a lesser payment temporarily, until your finances are back on track.
Some alternatives if you don’t want to stay in your home and would rather walk away:
Deed-in-lieu: In exchange for partial or total debt forgiveness, you voluntarily give ownership of the home back to the lender. This is usually when foreclosure is imminent, and you can no longer afford the payments and do not want to sell the property yourself.
Short sale: If you want to sell the home yourself and owe more than the home is worth, you could ask your lender if you could do a short sale. The property usually sells for less than the balance of the mortgage.
These options may hurt your credit, but not as badly as a foreclosure.
Over the past three months, the stock market has been on a roller coaster. Investment portfolios have followed suit, which could be particularly concerning for those who are counting on those funds for retirement.
For those close to retirement, a lack of savings may mean monthly expenses go unpaid. As a result, retirees may be considering a reverse mortgage to bring in much-needed cash.
“Retirement accounts have been suffering under the macroeconomic conditions that we see out there today. People are looking at the use of home equity to absorb some of those shocks in their retirement plans,” says Steve Irwin, president of the National Reverse Mortgage Lenders Association.
Because there’s a long lead time for a reverse mortgage, Irwin says it’s too early to tell if the numbers are up. However, a leading indicator shows we might be on the edge of a wave of reverse mortgages.
NRMLA data shows an uptick in consumers who’ve taken the initial step and completed the financial counseling needed to proceed with a reverse mortgage. Irwin says counseling sessions in the month of March were up 25% compared with the year before.
Before homeowners can apply for a reverse mortgage or complete a final application, they must complete independent third-party counseling, he notes, adding that those counseling sessions are up significantly in the first quarter.
Historically, those counseling sessions had to be done in-person, but because of the COVID-19 pandemic, some states have allowed online sessions.
Reverse mortgage basics
Since the first reverse mortgage in 1990, over a million have been issued and currently about 550,000 are outstanding, according to the NRMLA. Unlike a forward mortgage, in which you pay down a loan to live in your home, a reverse mortgage draws from the equity you’ve built up in your home.
To qualify for a reverse mortgage you must meet the following criteria:
Be aged 62 or older
Own your property outright or owe a small amount on a traditional mortgage
Live in the home as your primary residence
Not be delinquent on any federal debt
Meet with an approved counselor
Most reverse mortgages are backed by the Federal Housing Administration as part of the Home Equity Conversion Mortgage program. Once approved, a borrower can withdraw funds as a lump sum, a fixed monthly amount, a line of credit, or a combination of these options. The loan comes due when the borrower either moves out or dies.
And although the instant hit of cash may be a welcome development, the homeowner is still responsible for other monthly payments.
“Keep in mind with reverse mortgages … you still have to have the financial resources to live in the house,” says Mary Bell Carlson, the accredited financial counselor behind the Chief Financial Mom. “You’re going to be living in the house, you still owe the property taxes, you still owe the insurance, the HOA, and all the maintenance on the home while you’re living there.”
Keep in mind, a reverse mortgage will hand you money, but the lender uses the equity in your home to give you that money.
“The amount of funds available through a reverse mortgage are calculated based on the age of the borrower, or in the case of a couple, the youngest person’s age, the home’s value, and the interest rates in effect at the time,” Irwin explains. “The lower the interest rate, the greater percentage of equity that can be made available.”
“We understand a lot of people have been looking at the reverse mortgage and just haven’t decided whether or not to move forward. But they understand that responsible use of home equity can absorb different shocks to people’s income streams,” Irwin says.
Another pandemic-related factor in play? Nursing homes and assisted-care facilities aren’t exactly an appealing option in the current climate. This may partly be why some seniors are opting to stay put in their own homes.
“We know that people want to age in place, and I think many senior homeowners who may have been considering moving or moving to a care facility are almost hesitant and reluctant to go anywhere right now,” says Irwin.
Before contemplating a reverse mortgage in the current environment, you must consider if you can still pay the expenses that come with owning a home. Lower interest rates will mean more cash in your hand, but if you don’t have funds set aside to cover needed repairs, maintenance, and other expenses of homeownership, pause for a moment to suss out your best option.
“A [reverse mortgage] doesn’t mean that [borrowers] just live scot-free in the home. They still have to have some kind of cash flow to keep up the home, and they can’t let the home fall into complete disrepair. That is a violation of the contract, and they could lose the house for that,” Carlson says.
Irwin says the answer depends on each homeowner’s situation.
“This is an individual case-by-case decision, and we want to ensure that it is a decision that’s carefully considered and discussed with trusted advisers and family members. But from strictly the available amount of proceeds given the current interest rate, yes, it is a good time.”
The future of reverse mortgages
Irwin says he expects more seniors to look at reverse mortgages as the pandemic-fueled financial crisis continues.
“It’s a needs-based transaction. They need to augment their financial stability,” Irwin explains. “They need to augment whatever retirement funding they have in place, or they need to relieve themselves of the burden of monthly principal and interest payments of a regular mortgage. I think that we will see more and more the use of the reverse mortgage as part of a more comprehensive financial plan in retirement.”
The coronavirus crisis has heightened financial anxiety and uncertainty. But if buying a home has been part of your life plan, there’s no need to panic. Many Americans will receive stimulus payments in the coming weeks, which could ease some of the burden, and if you’re able, now is still a good time to start saving for the down payment on your mortgage.
So where should you put that money while you amass the right amount? There are a number of places to stash your cash—each with its own pros and cons.
“Some have low risk, but also low returns, like a savings account or CD,” says Sherry Graziano, head of mortgage omni experience at Truist. “Other options may have higher returns, but they typically have a higher risk associated with them.”
Exactly which type of account will work for your own personal path to homeownership depends on your individual financial situation, how soon you plan to buy a home, and how much risk you’re willing to take. Here’s a look at your options.
Savings, checking, or money market accounts
Best for: People buying a home in three months or less
If you plan to buy a home fairly soon, a savings account is one of the safest places to put your money. They are FDIC-insured, meaning your money is protected in case of banking institution failures, and your money is always accessible.
“The least risky type of account is a savings account,” says Shelby McDaniels, channel director of corporate home lending at JPMorgan Chase. “They are highly insured. It is simple to link a checking or direct deposit to the account, and most do not have any restrictions on timing.”
Most first-time home buyers, she says, use a savings account to begin the process of buying a home.
The downside? Savings account interest rates tend to be low, with less than a 2% annual percentage yield, according to an America’s Best Rates survey. High-yield savings accounts averaged 2% to 2.4%, but some require a minimum deposit or that you maintain a minimum balance.
Money market accounts are another option. They are similar to savings accounts, but offer some checking features and sometimes a little more interest.
If you’re opting for a savings account, make sure you’re aware of any fees or requirements, like maintaining a minimum balance, Graziano says.
Certificate of deposit
Best for: People buying a home in three to 12 months
A certificate of deposit, or CD, is another low-risk option. Offered by banks and credit unions, CDs give savers interest on a lump sum of money if they leave it in the account for a designated time frame, such as three, six, or 12 months, or even longer.
If you’re saving for a down payment, CDs have a couple of downsides.
“CDs typically don’t allow for additional deposits, so that may not be the best option if a client is planning on making continuous deposits,” Graziano says.
CDs also have a low interest rate—just a hair higher than savings accounts—and the money isn’t accessible until the CD has matured.
McDaniels suggests choosing a CD that will work well within your time horizon so you can use it when you need it.
Best for: People buying a home in three years or less
A 401(k) is a retirement account that you contribute to tax-free, but it has annual contribution caps and limits when you can withdraw money before you reach age 59 and a half. For 2020, the contribution limit is $19,500, according to the IRS.
Buying a home is one instance where you can use money from your 401(k) before reaching retirement age, but it can be risky.
Early withdrawals come with a 10% penalty on the amount taken out, and you’ll have to pay income tax on the distribution.
You can also take a loan against the 401(k). However, Graziano says, “the client would want to determine the amount of the repayment, and be sure that they will be comfortable with the new house payment and 401(k) repayment responsibility.”
Another thing to consider: You’ll miss out on any interest you would have earned on the money taken out of the 401(k), McDaniels notes.
“This can be a good short-term option for someone who knows they will be able to pay back their 401(k) loan quickly, with no penalty,” she says.
Best for: First-time home buyers purchasing within three years
A Roth IRA, or individual retirement account, is usually opened at a bank or investment firm. Roth IRAs are a good way to save, because you fund the account with after-tax money, meaning contributions aren’t deducible but funds withdrawn when you retire are also not taxed as income.
First-time home buyers can often take money out of their Roth IRA to buy a home without paying a penalty. You can withdraw the amount you’ve contributed tax- and penalty-free, and then, once the contribution amount is maxed, you can take out as much as $10,000 of the account’s earnings.
Historically, IRAs have earned high interest of 7% to 10%, and money can be accessed within a few days. But keep in mind that Roth IRA contributions are capped at $6,000 for 2020, so you can save only so much per year. And you can’t repay the money you take out like you can with a 401(k). So once you take it out, even to buy a home, it’s gone and you miss out on the years of accumulating interest.
Best for: People buying a home in five years or more
The stock market fluctuates, so investing and hoping your money grows before you buy a house with it can be a risky move. Still, if your time horizon for home buying is more than a few years off, this could be a decent option where your money could expand by as much as 10% during boom market years.
“Higher risk typically means greater return,” Graziano says. “But keep in mind there is no guarantee when investing in the stock market. The account may lose value, too.”
Investing in the stock market can be complex, and you may owe fees and commissions.
McDaniels suggests carefully examining your financial situation and home-buying plans to evaluate the benefits and risks. And when you sell your stock, it can take up to three days to see your money, according to rules set by the Securities and Exchange Commission.
Make sure the cash is accessible
Wherever you choose to put your money, make sure it’s accessible when you find your home.
“The timeline and flexibility with the amount of down payment are the two biggest factors that a buyer should take into consideration,” McDaniels says. “Someone who has a flexible timeline or already has a portion of their down payment might want to consider an investment account. While someone who is just starting to save or plans to buy in a shorter timeframe (of a few months) might be best suited for a savings account.”
Exactly how much you need to save for a down payment varies by your lender and the type of loan you get. Before you buy a home, McDaniels recommends saving 20% of your take-home pay, as well as three to six months of your mortgage payment.
Lenders usually require 60 days of asset account statements verifying the funds needed for the home purchase, and the source of any large deposits.
“Money kept at home in a safe commonly known as ‘mattress money’ is not eligible to be used for the down payment or closing costs,” Graziano says.
With the economy in unprecedented territory and the phrase “housing crash” on the lips of economists, mortgage holders have questions. And current homeowners aren’t alone: First-time home buyers in search of a new mortgage also have questions on how and when to proceed.
For borrowers (and potential borrowers) in search of answers, we present your most frequently asked mortgage questions—along with the all-important answers.
Our top 12 mortgage questions range from the basics to more complex financial moves, to assist consumers who’ve been financially affected by the ongoing pandemic. If you have a question we’ve missed, please drop us a line and tell us your question.
1. Are mortgage rates going down?
It depends on the comparison. Mortgage rates are down from a year ago, but up from a few weeks ago. It’s unclear whether they’ll be headed down again.
In a recent realtor.com® article about mortgage rate fluctuations, Matthew Graham, chief operating officer of Mortgage News Daily, said rates are “the most volatile they’ve ever been, by a wide margin.”
Much like the stock market, mortgage rates have been on a wild ride. In early March, rates were at a record low, then went back up.
“Mortgage interest rates are closely correlated with the 10-year Treasury yield, which has stayed below 1% for much of the last month,” says Bill Banfield, executive vice president of capital markets for Quicken Loans and mortgage platform Rocket Mortgage. “In general, bad economic news is good news for mortgage rates. Mortgage rates will likely stay low as long as the 10-year Treasury yield also remains at its low levels.”
2. Why have mortgage rates gone up?
Despite a constant drumbeat of negative economic news, mortgage rates have gone back up after hitting a record low in early March.
We examined this phenomenon in a recent article about the upward trend in rates. In short, homeowners rushed to take advantage of low rates and refinance their existing mortgages. To handle the rush, many lenders raised rates, in hopes of slowing down the stampede.
In the secondary mortgage market, a wave of refinancing created a glut—which sent rates higher. Lenders often bundle and sell some of their home loans as mortgage-backed securities on the secondary market. This frees up cash for lenders to make new loans. More bundled loans on the market meant lower prices for those securities.
But even though rates have crept up, there’s room for them to fall again with so much uncertainty in the marketplace.
“We’re in uncharted territory, so you can’t look to history as a guide to what could happen. It’s hard to predict how mortgage rates will react,” says realtor.com’s chief economist, Danielle Hale. “I don’t think they’ll go up until it’s pretty clear we’re out of the woods. They might move sideways, or they might go down more slowly.”
3. What are mortgage rates today?
Mortgage rates change daily (even hourly), and a number of elements factor in to the rate a borrower locks in. Although many people follow the Federal Reserve’s actions when it slashes or raises the federal funds rate, that doesn’t directly affect mortgage rates.
“You’re not getting [a mortgage] directly from the Fed,” says Mary Bell Carlson, a certified financial planner known as the Chief Financial Mom. “You’re getting it through a service provider, which is a bank or mortgage lender.”
Mortgage rates are influenced by both the federal funds rate and the Treasury bond market. In addition, each lender adds a percentage to the rate to account for various company fees, Carlson says. So even when the federal funds rate is at 0%, you’re not going to finda mortgage that allows you to borrow with zero interest.
The realtor.com mortgage rate finder will give you information on mortgage rates in your area. All you’ll need to do is enter your ZIP code and answer questions such as the following:
If you are looking to buy a new home or refinance
The type of home you want to buy
Where you are in the home-buying process
If you plan to use the home as a primary residence, vacation property, or investment
Your veteran status
Whether you’re a first-time or repeat home buyer
Your projected price range and how much you’re willing to put as a down payment
Financial information such as your household gross income, credit score, employment status, and past bankruptcy filings
Once your information is entered, you’ll see the latest mortgage rates in your area.
And because each lender is different, it pays to research and shop around.
Carlson advises not to limit yourself when it comes to working with lenders and to look beyond your own bank.
“You absolutely want to do your homework and check around,” says Carlson.
4. Should I refinance my mortgage now?
Mortgage rates are low, and if you secured a mortgage in early 2019, 2018, or 2017, you’re likely a solid candidate for a refinance. Be aware, though, a refinance replaces the original loan with a new one and you may have to change lenders.
“It’s a great time to take advantage of how far rates have fallen in the last month, and it’s a pretty dramatic decrease, especially for somebody who took out a mortgage 12 to 48 months ago,” says Banfield.
The realtor.com refinance calculator can help you determine if refinancing is a smart strategy. You’ll need to provide a few critical bits of information to get a well-informed answer:
Original loan amount
Original loan terms and rate
Original loan origination date
The current balance on your mortgage
Whether or not you want to take out some cash
New loan terms and rates
The amount of the new loan you want
The refinance calculator will provide you with an idea of how much you could save, and tell you how long it will take for you to break even. To calculate your break-even point, divide your total refinance costs by the monthly savings you’ll reap. For example: If your refinance cost $2,500, and you’ve knocked $100 off your monthly mortgage payment, your break-even point is 25 months.
“My check [for a refinance] is always: How long are you going to stay in the house? If you’re going to stay there longer than your break-even point, that makes sense for you to refinance; otherwise stay where you’re at,” says Robert Parades, a Tampa, FL–based branch manager for Hometown Lenders.
Assuming that a federal rate of 0% means you can get a 0% mortgage rate (Not true!)
Jumping on the refinancing trend too late
Forgetting about the fees associated with refinancing
Refinancing too much equity out of your home in a time of uncertainty
Expecting to lock in your lender’s quoted rates and fees ASAP
Shopping for the right loan for too long
If the calculator shows you could save some money by refinancing and you’re going to stay in your home long enough to break even and then some, make the move sooner rather than later. Rates are creeping back up, and if you’re affected by unemployment or a furlough, you likely won’t qualify for a refinance.
5. My mortgage payment is too high—what can I do?
If your mortgage payment is too high, you might want to consider refinancing if the timing is right.
“We have had a refinance boom. My team rarely does refinances, and I do maybe one refinance a year. In the last 30 days, I’ve done 14,” says Parades. “The interest rates probably about a year ago for somebody with decent credit were about 4.5% or 4.7%. With the government buying all of the mortgage-backed securities, it has deflated those rates to as low as 3.25%.”
6. Can I stop paying my mortgage for a few months?
Because of the pandemic, borrowers all over the country are dealing with unemployment or furloughs. Lenders understand the current economic situation and are offering options to clients who can’t currently pay their mortgage.
“What I’m telling people right now is, if you cannot pay your mortgage this month it’s important to reach out to your mortgage lender and negotiate and talk through it,” Carlson advises. “A lot of lenders are offering relief opportunities.”
Policies vary, but some lenders are allowing borrowers to pause payments for a few months. Several are waiving late fees, penalties, and the reporting to credit bureaus that often come with missing payments.
However, it’s a bad idea to stop paying without contacting your lender. Without a plan in place, you’ll accrue late fees and eventually face foreclosure proceedings.
Keep in mind: When a deferment or forbearance period is over, the missed payments are due, so there is no free money.
However, many lenders are allowing customers to work out terms other than paying a lump sum at the end of the forbearance period. When you contact your lender, be honest about your financial situation.
7. What are the repercussions if I stop paying my mortgage?
Again: Don’t do it. Speak to your lender. Putting your head in the sand and simply not paying your mortgage is a bad move and can have serious consequences.
“The worst thing people can do right now is just bury themselves and not do anything. The payments continue to come, and the [lender] has no idea how to help you,” Carlson says. “It’s better to reach out and be proactive rather than reactive.”
If you stop paying and ask for forgiveness months down the road, lenders might not be as willing to help you. Your decision will also affect your credit score, hampering your chances of obtaining any kind of loan in the future.
Carlson says it’s important to prioritize what you can and can’t pay. She adds it’s better to pay secured debt like mortgage and car payments before credit cards.
“If you don’t pay your credit card bills, they can’t come to your home and repossess your TV. They have no ability to repossess anything or touch your personal property [over missed] credit card payments,” Carlson says. “Whereas, if you don’t pay your mortgage lender, they can absolutely come and take your house.”
8. What is a cash-out refinance?
A cash-out refinance is a way to refinance a mortgage and turn some of the equity in your home into cash. This strategy is often used for home improvements or to consolidate debt. It differs from the main goal of a traditional refinance, which is to lower your monthly payment.
With a cash-out refinance, you’ll get money back from the bank. The loan usually has a fixed rate, unlike a home equity line of credit, which often has a variable rate. Also, a cash-out refinance replaces the first mortgage and doesn’t add a second mortgage like a home equity line of credit.
“If you have been paying down your mortgage in timely manner and you’ve built up enough equity, it’s a good time to tap into it,” says Sathi Roy, head of refinance at Better.com. “If someone is a little strapped for cash right now, it’s a perfect option.”
Roy says her company has seen a 150% increase in cash-out refinances since March.
The refinance calculator can help you figure out how monthly payments could change if you choose to employ the cash-out strategy.
9. What is mortgage forbearance?
“Forbearance [is a program] that would allow a temporary period for a borrower to not have to make a contractual monthly payment amount,” says Sara Singhas, director of loan administration for the Mortgage Bankers Association. “You can either pay a lesser amount of your mortgage—or not pay anything at all—for a period of time.”
At the end of the forbearance period, the amount of the missed payments is due, often in a lump sum. However, lenders do sometimes allow payment plans. Forbearance is for a short and specified term, and does not change the terms of your loan.
Mortgage forbearance requests shot up 1,270% between the weeks of March 2 and March 16. The association also showed the number of loans in forbearance went from 0.25% of all mortgages to 2.66% from March 2 to April 1.
During a forbearance period, lenders will not charge late fees or penalties, report missed payments to the credit bureaus, or begin foreclosure proceedings.
Lenders use the term “forbearance” interchangeably with “mortgage deferment.”
No matter what you call it, don’t let it dissuade you from reaching out to your lender and asking for help. Lenders will not automatically offer forbearance if you miss a payment. A plan must be in place if you think you can’t make your monthly payment. A solid payment history helps in forbearance cases, but in these unprecedented times, many lenders are changing their rules and regulations.
“The important thing to get across to folks is, if you need help, talk to a servicer because there are absolutely ways that borrowers can get assistance with paying their mortgage payments,” says Singhas.
10. What is a loan modification, and how do I get one?
A loan modification changes the original terms of a mortgage loan. It’s different from a refinance in that it does not pay off the original loan and replace it with a new one. Instead, it changes the conditions of the current loan.
“It is usually used when a homeowner has unexpected financial hardship that makes it difficult to make their mortgage payment,” Quicken’s Banfield says. “Under normal circumstances, a modification of a mortgage results in an adverse impact to a client’s credit history and credit score.”
Loan modifications can include an interest rate change, an extension in the payment schedule, a different type of loan altogether, or a combination of these levers.
“A homeowner can only get a loan modification through their current mortgage servicer, because they must consent to the terms,” Banfield explains. “Every servicer has its own standards for loan modification, and homeowners should contact their servicer to see if they qualify for a loan modification.”
11. Should I get a home equity line of credit?
A home equity line of credit, or HELOC, can help you turn equity you’ve built up in your home into cash. This financial tool is usually deployed for home improvement projects or updates. In current financial times, people are using HELOCs to pay bills.
“For some people, it’s their go-to option for savings—a lot don’t have other places to turn,” Carlson says. “Our homes are the biggest asset we own … so it is the asset that we turn to when times are tough.”
You can get a HELOC only if you have equity built up. So if you put 0% down on your home, have an interest-only loan, or have owned your home for less than a couple of years, there likely won’t be any equity to tap.
The interest rate on a HELOC is often variable, meaning it will adjust up during the period of the loan. Even though rates are low right now, there are risks associated with a HELOC.
A HELOC is secured debt, and although a HELOC is a lower-cost option to borrow money than credit cards, there are risks.
“If you don’t pay [HELOC] debt, it is tied to your home,” Carlson warns. “You’re adding a risk, because if you can’t pay that home equity line of credit back over time, your home is now at stake.”
12. Where can I find a mortgage calculator?
A mortgage calculator will help you figure out what you can afford and how much you’ll need to borrow. Yes, realtor.com has a handy mortgage calculator to guide your way.
The calculator will help estimate your entire monthly house payment—the principle, interest, taxes, homeowners insurance, and private mortgage insurance.
In order to use the tool, you’ll need to know:
The price of the home you’re considering
Estimated down payment amount
Mortgage interest rate
As you adjust the different numbers, you will see how your monthly payment can slide up or down. The largest variables at play are the home price and how much money you plan to put toward a down payment.
Realtor.com also provides an affordability calculator to help you figure out how much you can afford to spend each month on your mortgage. To use it, you’ll need to input your information:
Annual gross income
Down payment amount
Credit score range
This calculator provides guidance you’ll need to make an informed decision on how much home you can afford. Carlson also recommends running the numbers based on your net income to see the difference—net income is what you actually bring home each paycheck.
“Roughly speaking, if you can get a mortgage payment that is anywhere between a quarter to a third of your net take-home pay, that’s the sweet spot,” she says. “Because what that means is, if you have a quarter or a third of your income [for a mortgage], that means you’ve got two-thirds or three-quarters left to spend on everything else, including car loans, student loans, utilities, and food.”
A letter arrives in the mail and tells you your mortgage has been sold. It also informs you to send your monthly payments to a new address. Don’t panic! This happens all the time, and you shouldn’t see many (if any) changes.
“I would say probably 30% to 50% of the time [borrowers are] going to eventually end up mailing their payments somewhere else different from when they first originated it,” says Rocke Andrews, president of the National Association of Mortgage Brokers.
So why does your mortgage get sold—and why can it happen multiple times? Banks and mortgage servicers constantly check the numbers to find a way to make a buck on your big loan. It all takes place behind the scenes, and you find out the result only when you get that aforementioned letter in the mail.
What does a mortgage being sold mean for homeowners?
The short version: When a loan is sold, the terms of that loan don’t change. But where a mortgage-holder submits payment and receives customer service may change as the loan gets sold. And that could affect a few things.
“The level of service that you receive may vary depending upon who the servicer is,” Andrews says. “Certain servicers might offshore a lot of that [work]. So when you would call into servicing you could get a call center in India or over in Asia somewhere and people were less than knowledgeable about the product.”
But service issues that lead to frustration are the exception, not the rule, says Andrews. “Most [consumers] don’t deal with the servicers that much, they just send in a payment and things are happy.”
The new servicer might offer different payment options and may have different fees associated with payment types, so be sure to check any auto payment or bill pay functions you’ve set up.
The basics of mortgage servicing
To understand why mortgages are sold, it’s important to understand some basics.
First, when you take out a mortgage to buy a home, a lender approves your loan and you make payments to a loan servicer. Sometimes, the servicer and the lender are one and the same. More often, they’re not.
The servicer “collects the payment and disburses it out,” Andrews says. “They distribute the payment to the investors, [send] property taxes to the local taxing entity, and [pay] homeowners insurance. They are taking care of all the payments coming in and getting them distributed to the people they belong to.”
Andrews says a small portion of the interest you pay on a loan—often a quarter of a percent—goes to the servicer.
“Typically servicing is a labor-intensive business—there are only five or six servicers [nationwide] that probably handle 75% to 80% of all the mortgages in the United States,” Andrews explains. Major players include Chase, Wells Fargo, Citibank, Freedom, and Mr. Cooper. Some of these companies service the loans they originate.
Servicers can sell your mortgage
Lenders can enter agreements with servicers to purchase batches of loan servicing. Or lenders may shop around for a servicer if they’re carrying too many loans on their books.
Servicers are interested in buying loans in order to sell other products to their new-found customers. Andrews uses an example of a big bank that can then attempt to sell retirement funds, credit cards, or other profitable financial product to customers they had no prior relationship with.
Many lenders originate loans, and then proceed to sell off the servicing or the loan itself. If the servicer changes, the customer must receive a notification. There will be a grace period in case a borrower accidentally sends payment to the wrong place.
Lenders often sell the loans to financiers as a mortgage-backed security for investors or to government-sponsored entities like Fannie Mae, Freddie Mac, and Ginnie Mae.
So why does my mortgage get sold?
Loan servicers are businesses in search of a profit. Andrews says the value of the servicing depends on two main factors:
Whether a borrower pays on time or not
How long the borrower will be paying
If a servicer receives a quarter percent for servicing a 30-year mortgage, a consumer who pays steadily for the life of the loan is more valuable than a borrower who opts for a refinance within a few years.
Keep in mind: During a refinance, the new loan pays off the old loan, and new terms are set. So if a servicer was expecting to earn a quarter of a percent over 30 years and the borrower refinances after only five years, the servicer gets the share for five years as opposed to 30.
For example, if you have a $100,000 loan at 4% for 30 years, you’d pay about $70,000 in interest over the life of the loan. However, the lender would need to wait a full 30 years to make that full $70,000. In hopes of a quicker profit, lenders will often sell the loan.
If servicing a loan costs more than the money it brings in, lenders may attempt to sell the servicing of it to lower their costs. The lender may also sell the loan itself to free up money in order to make more loans.
Loan servicers have another consideration in play. They need to pay investors who buy mortgage-backed securities—even if a consumer with a mortgage can’t make payments or is in forbearance.
“The downside to forbearance is the servicing company has to make your payment for you,” Andrews says. “That’s why we’re running into problems.”
With millions of homeowners asking for forbearance, Andrews predicts more mortgages will be sold.
Can I state that I don’t want my mortgage sold?
Somewhere in the terms and conditions of your mortgage paperwork, it likely says your mortgage can be sold. Andrews says there is really no way to keep it from happening.
The trade-off for the odd behind-the-scenes shuffling of your mortgage is a lower interest rate for you—the all-important borrower.
“It’s just part of making the entire mortgage industry safer, more liquid,” Andrews says. “Back in the old days you would go to the bank and make your payment at the bank.” The rates depended on how much money the bank had and the area economy.
But instead of the bygone days of interacting with the local banker, nationwide competition for your borrowing needs has been unlocked.
“By nationalizing the mortgage market, you provide lower rates and better options to the consumer,” says Andrews.
Those who are fortunate enough to still be collecting a paycheck while quarantined or sheltering in place might expect to build up some serious savings. While you work from home, you’re avoiding your usual commuting expenses, and you’re probably saving money by not going to bars, restaurants, and movies, or skipping that vacation to Fiji.
But as spending decreases in some areas during self-isolation, it can creep up in others. To brace yourself and your budget, keep an eye on these expenses while you’re self-isolating at home.
If you’ve gone from office life to Zoom life, you’re spending more time at home than usual, which could ramp up your household expenses.
“Your utility spending might be considerably higher if you’re spending more time at home cooking, charging devices, using lights and appliances,” says Ted Rossman, industry analyst at CreditCards.com.
To keep your utility bills down, turn off lights when you leave the room, open windows during the day to let in cool air, unplug devices that you’re not using, and consider turning down your water heater by a few degrees.
Even if you’re not hoarding (and you shouldn’t be), you might find yourself spending more on groceries while you shelter in place.
For some people, an uptick in grocery spending will be offset by the money saved from not dining at restaurants. But if your local store is picked over—or if you pay fees for grocery delivery—you could spend more on groceries than usual.
If your grocery spending feels out of hand, be flexible and creative with your menu. Cook the food you already have at home before you head back to the store. Sites such as Eater have compiled resources for home cooks, including Pantry Cooking 101 and How to Stock a Pantry.
If you’re using a delivery service, place infrequent, larger orders instead of several small orders. Or consider curbside service; many stores are allowing free pickups where they bring your groceries right to your car, so you can save on delivery fees and tips.
3. Meal delivery and takeout
You may not be able to enjoy a nice meal at a restaurant, but you can order takeout and delivery—and those indulgences can add up quickly. After all, it’s not just the meal you’re paying for.
“There’s probably still a service fee, and on top of that you have to leave a gratuity,” Repak says. (It’s also a good idea to generously tip the workers who are delivering your food in these times.)
If you’re on a budget, reserve takeout and delivery for special occasions or those days when you just can’t muster the motivation to cook.
4. Alcohol and other sources of comfort
If you find yourself decompressing with a glass or two (or three) of wine every night, your drinking habit could do a number on your budget. And you wouldn’t be alone—alcohol consumption has shot up nationwide, and in states where recreational marijuana is legal, dispensaries are reporting booming business.
“Social isolation is really strongly linked to physical and mental health problems, and the way we cope with a lot of them is by drinking more,” Repak says. “People are going to smoke more and drink more … and we need to find other healthier coping mechanisms to offset that additional spending.”
You may not want to totally forfeit your evening glass of pinot, but you can make your supply last longer by sipping a mug of (far more affordable) chamomile tea on occasion, or opting for a calming yoga video or breathing exercise.
You’ve rewatched all your favorite shows on Netflix and Hulu—so, now’s the time to add a Disney+ subscription, right?
Not so fast, Repak says.
“Save a little bit of money by just picking one of the streaming services,” he suggests, or at least don’t pile on new subscriptions to the ones you already have.
To free up your budget, take inventory of your other monthly subscriptions, services, and other recurring expenses, and see if there’s anything that can be eliminated.
“Ten dollars a month may not sound like a lot, but if you have five of those, that’s $600 annually,” Rossman adds.
6. Online shopping
If you turn to retail therapy to soothe your soul, your budget could take a hit. True, many retailers are offering deep discounts in order to move merchandise, but even discount purchases add up.
“Impulse buying is a potential trap,” Rossman says. “Some people fall victim to it more than others.”
Instead of clicking “add to cart” as a coping mechanism, Repak suggests cleaning out your closet instead.
“This is a great time that we can offset our budget by decluttering our house or apartment,” he says.
Use sites like Poshmark to sell your clothes, or Mercari for your household items. Many donation centers such as Goodwill are still accepting donations, too—just call ahead to make sure your local store or donation drop-off location will take your items.
7. New hobbies you’re trying in quarantine
Our spending habits are highly personal, and you might find yourself throwing money at a new habit or hobby to fight cabin fever.
“It’s a worthwhile exercise to track your spending, especially now that so much is different,” Rossman says. “Look through your credit card and bank statements from the past month. Do you see anything surprising? Are there areas where you spent extra but didn’t feel it was worth it? These could be good ways to cut back.”
And remember: Even if quarantine has eliminated some of your old day-to-day expenses, it’s easy to overestimate how much you’re saving.
“Most people don’t have a great handle on their budget and spending habits anyway, and so much has changed of late,” Rossman says. “It’s easy to overlook things.”
Homeowners are asking for breaks on their mortgage payments in droves, as millions of Americans face the prospect of unemployment or reduced income because of the coronanvirus pandemic. But requesting forbearance on your mortgage isn’t foolproof.
Requests for forbearance have poured in. Forbearance requests grew by 1,896% between March 16 and March 30, according to a recent report from the Mortgage Bankers Association, a trade group that represents the mortgage industry. And before that, forbearance requests had increased some 1,270% between March 2 and March 16.
As consumers have rushed to call their servicer in search of assistance, call centers have been overwhelmed, leading to longer wait times to speak with a representative.
“If you are eligible for this and you need the help, take full advantage of the program,” said Rick Sharga, a mortgage industry veteran and founder of CJ Patrick Company, a real-estate consulting firm. “But similarly, if you don’t need the help, and if you can pay your mortgage, don’t try and game the system and make it harder for people who really do need the benefits to access.”
For those who have yet to get a forbearance agreement in place, here’s what you need to know:
‘Forbearance is not forgiveness’
To be clear, mortgage borrowers will still need to pay off their loan eventually if they receive forbearance.
“Forbearance is not forgiveness,” said Karan Kaul, a research associate at the Urban Institute, a left-of-center nonprofit policy group. “You still owe the money that you were paying, it’s just that there’s a temporary pause on making your monthly payments.”
‘Forbearance is not forgiveness. You still owe the money that you were paying, it’s just that there’s a temporary pause on making your monthly payments.’
Karan Kaul, a research associate at the Urban Institute
Under a forbearance agreement, a borrower can pause payments entirely or make reduced payments on their mortgage. Homeowners with federally-backed mortgages are eligible for up to 180 days of forbearance initially under the CARES Act. At that point, if they’re still facing financial difficulty, they can request an extension of up to another 180 days of forbearance.
The provisions in the stimulus package stipulate that during the forbearance period, mortgage servicers cannot make negative reports about the borrower in question to credit bureaus, including the three main ones, Experian, Equifax and TransUnion. Borrowers also will not owe any late fees or penalties if they are granted forbearance.
You need to know who your servicer is
Struggling homeowners won’t automatically receive forbearance. You need to request it from your servicer.
Mortgage servicers are the companies who receive your monthly payments. A homeowner’s mortgage servicer isn’t necessarily the same as their lender — many lenders sell the servicing rights for mortgages to other companies.
The first step to figure out who your servicer is would be to check your mortgage statement. If for some reason the information isn’t there, you can look it up by searching the Mortgage Electronic Registration Systems website. Alternatively, you can check with Fannie Mae and Freddie Mac, if your loan is backed by one of them.
How do you know if you qualify?
To qualify for forbearance, a borrower must have a mortgage backed by one of the following federal agencies:
• Fannie Mae
• Freddie Mac
• The Federal Housing Administration (FHA)
• The U.S. Department of Veterans Affairs (VA)
• The U.S. Department of Agriculture (USDA)
Borrowers should avoid calling their servicers to find out if they’re eligible, Sharga said.
“Find out what you can before you try and reach your mortgage servicer, because they are overwhelmed with call volume right now,” Sharga said.
Fannie Mae and Freddie Mac both have websites where you can check whether your loan is backed by one of them. You can access those websites here and here. Almost half of all mortgages in the U.S. are backed by Fannie and Freddie.
To find out if your loan is backed by the FHA, check the original closing documents or your most recent mortgage statement. If you pay for FHA Insurance, then that agency is backing your loan. Alternatively, your closing documents should include a HUD (Department of Housing and Urban Development) statement and a 13-digit HUD number.
Because the VA and USDA loan programs target specific borrowers, those borrowers should already know if they have loans backed by those agencies. In the event you are still unsure, you can call your servicer.
Those who aren’t eligible aren’t necessarily out of luck, though. Servicers for non-federally-backed mortgages may still be willing to provide forbearance to borrowers facing financial trouble right now.
Be prepared to answer some questions
You don’t need to provide documentation to prove your financial hardship at this time, but your servicer may have some questions to determine how much assistance they will offer you.
• Is the problem you are facing temporary or permanent?
• What is the current state of your income, expenses and other assets, including money in the bank?
• Are you a service member with permanent change of station orders?
“Consumers should indicate they have had a hardship due to COVID-19 and ask about their forbearance options with the company servicing the mortgage loan,” said Chris Diamond, director of financial products at online mortgage lender Better.com. “They should ask how long of a forbearance they can qualify for as well as what their options are at the end of that forbearance period.”
Get your forbearance agreement in writing
The CFPB stresses that any borrower who has received a reprieve on mortgage payments should get their agreement in writing.
“Once you’re able to secure forbearance or another mortgage relief option, ask your servicer to provide written documentation that confirms the details of your agreement and that you’re clear on what the terms are,” the agency said on its website.
Having the agreement in writing will protect you if there are errors in your mortgage statement or your credit report.
Watch out for balloon payments
After a borrower has secured a forbearance agreement from their servicer, they should discuss repayment options.
“You don’t want a surprise like finding out that six months of deferred loan payments are all due immediately upon the end of the forbearance,” Sharga said. “Most people simply won’t have six months’ worth of mortgage payments available.”
Some borrowers have expressed concerns after being offered a balloon payment option like the one Sharga described. With a balloon payment, a borrower would pay back the entire amount owed for the forbearance period at once.
While a lender may offer a balloon payment as an option, there is no mandate that a borrower must repay in this manner, Kaul said.
Homeowners can and should aim to negotiate the best possible repayment options for them. “All those terms are negotiable,” Sharga said. “Be diligent, be steadfast and try and stand your ground.”
Beyond a balloon payment, servicers may offer to extend the term of the mortgage and tack on the missed payments at the end, so a 30-year mortgage would be extended by 4 months if that’s how much forbearance a borrower received.
There is no mandate that a borrower must repay what they owe in missed payments in one balloon payment after forbearance.
Alternatively, a borrower may also be offered the option to amortize the balance they owe over the life of the loan. This means they would repay a portion of the balance owed in addition to their usual monthly payments.
A borrower can request information on who owns their mortgage note, since the owner might be able to provide more relief options. Servicers must respond to these requests within 10 business days, said Andrea Bopp Stark, an attorney with the National Consumer Law Center.
“If the servicer does not respond, the borrower should send another letter and seek legal assistance,” Bopp Stark said. “The servicer could be held liable for actual damages and up to $2,000 statutory damages for a failure to respond.”
If you’re still in financial trouble after forbearance, consider a loan modification
It’s too soon to tell whether 12 months of forbearance will be enough assistance for those who are among the millions of Americans who have lost their jobs in recent weeks.
“The most beneficial option if the borrower might be out of work or impacted for an extended period is to request to modify the loan at the end of forbearance,” Diamond said.
Unlike forbearance, a loan modification involves a permanent change to the details of the mortgage. This can include adjusting the interest rate, extending the duration of the loan or deferring the amount owed until the end of the loan as a separate lien.
A servicer will determine whether or not a borrower qualifies for the modification.
In French, it means superior force. However, in legalese, the term force majeure refers to a clause that can allow a person or business to extricate themselves from a contract.
“In general, it’s a force outside the control of a party,” says Denver, CO, contracts attorney Susan Goodman. “What the force majeure clause says is: If there’s an act of force majeure, then performance is excused if the performance is affected by that act.”
In even plainer English, it means: If something completely unpredictable occurs, a contract may be voided.
The current pandemic certainly seems to fit the bill, and will have contract holders invoking force majeure for relief from creditors.
However, mortgage holders looking for a way out of their debt obligations are likely to be out of luck when it comes to following the path of force majeure. Here’s how force majeure works in a contract.
What is an act of force majeure?
Contracts with a force majeure clause often list (very) specific potential calamities. If any of those calamities come to pass, a contracted party is allowed to back out of the deal with no penalty.
Force majeure events often written into contracts include:
“Acts of God,” which often include severe weather, floods, earthquakes, hurricanes, fires, etc.
Acts of war
Acts of terrorism
Acts of government authorities
Strikes or labor disputes
An inability to secure materials
Other causes beyond the reasonable control of a party
Do all contracts have force majeure clauses?
Force majeure clauses are almost always written into business-to-business contracts.
However, personal mortgages usually do not contain force majeure clauses. Neither do apartment leases or contracts for home improvements.
Commercial leases and development projects often do, and those clauses may be invoked due to COVID-19.
“You’re seeing a lot of activity on the on the [commercial] leasing front now with the argument of force majeure,” says Jack Fersko, co-chair of the real estate department at the law firm Greenbaum, Rowe, Smith, & Davis LLP in New Jersey and co-chair of the American Bar Association’s real estate section committee.
Businesses “can’t use the space—whether it is because of the virus, which has closed operations down, or [because of local] government orders.”
Construction firms might also invoke the clause if they’re unable to meet deadlines or milestones on a development project. Adding to the confusion is that each state has different requirements for force majeure clauses, which means there’s no one-size-fits-all option.
Invoking a force majeure clause
By definition, an act of force majeure must prevent one or both parties from performing a service listed in the contract.
But economic hardship is not a reason to invoke force majeure.
“Anybody can always claim economic hardship. If your company goes into bankruptcy, that doesn’t void a contract, and you can’t get out of it by force majeure,” says Goodman.
As always, the key for consumers is: Be aware of all terms in any contract.
Courts around the country are already investigating COVID-19 and how it might relate to force majeure.
“I think it’s important to point out that this is such a unique situation. We’re already hearing that courts are treating things differently than one might expect—like not calling this an act of God,” Goodman says.
Fersko adds that there isn’t much legal precedent for the current crisis.
“I guess we’ll look to fall back to the early 1900s with the flu. We’ll look to other events in history that may be akin to this, and see what sort of case law evolved from that,” he says.
“In many respects, this being a worldwide pandemic, it’s certainly going to create some novel legal issues.”
Future contracts are likely to include allowance for pandemics
“Force majeure clauses are all written differently,” Goodman explains. She adds that she has seen some clauses with the word “epidemic,” but none with the word “pandemic.”
That will change, of course, after the coronavirus outbreak.
“Most force majeures after 9/11 added terrorism to the clauses. It was never in it before, because nobody really thought of it—because it wasn’t really part of our society,” Goodman says.
“I think pandemics and epidemics are going to be added to every force majeure clause. Attorneys are already advising their clients to do that.”
The key to a force majeure event is its unpredictability. However, if an unfortunate event or disaster was something that you could and should have prepared for, it’s nearly impossible to invoke the clause.