You need have a repayment mortgage plan in case you have defaulted on the mortgage. With this plan in place, you can start repaying a part of the defaulted amount each month when you make your monthly payments.
Usually lenders are quite understanding if you inform them that you are having a temporary financial problem. They will work with you to help resolve the matter as most lenders do not want to go for a foreclosure. Therefore, if you have defaulted, instead of avoiding the lender’s call or email, it is best to talk to them and explain your situation. Of course, the lender will ask you to submit everything in writing by way of a hardship letter, and details of your total income and total debt.
You can then come to an understanding where you will have to negotiate with the lender to spread the defaulted amount over a specified period of time, which usually ranges from 18 months to 24 months. However, even then the lender will ask you to pay a certain amount up front, usually around 25 percent to 50 percent, and the balance will be spread over the agreed number of months.
Usually lenders are willing to accept this arrangement as long as you give all the details that they ask for. The lenders would like to know and be assured that you will be able to make the partial payment along with your regular monthly mortgage payment.
3 Repayment plans to pay off your mortgage loan
While taking out a mortgage loan, you should calculate your affordability and decide how to pay it off within the stipulated time period. It is advisable that you choose a mortgage repayment plan that fits comfortably in your budget so that you’ve no difficulty in making the home loan payments on time.
3 Ways to repay your mortgage
Go through the following to know about mortgage repayment plans.
1. Monthly mortgage payment
- This is the most common mortgage repayment plan where you need to make a monthly payment that comprises of the PITI (Principal, Interest, Tax and Insurance). During the early stages of the mortgage loan, a considerable portion of your monthly payments go towards paying the interest while at the later stage, the amount is mainly utilized towards paying off the principal amount. Thus, in a fully amortized mortgage loan, you pay off the entire balance at the completion of the loan term.
2. Biweekly mortgage payment plan
- Biweekly mortgage payment plan is a suitable alternative to making monthly payments. In case of biweekly mortgage, you need to make the payments every other week. For making the payments, you simply divide your monthly mortgage payments into 2 biweekly installments. Thus, you actually make 26 half payments a year, which is equivalent to paying 13 monthly mortgage payments. This is because there are 52 weeks in a year and if you pay biweekly, you need to make 26 home loan payments. In this mortgage repayment plan, the 13th monthly payment is usually applied towards the principal amount, which affects the length of the mortgage significantly. You can pay off a 30-year home loan in just 23 years by choosing this payment plan
3. Graduated payment mortgage
- In you choose graduated payment mortgage, then you’ll have to make comparatively low payments at the initial years and it will increase with time. You can opt for this payment plan if you want to rebuild your savings after making the down payment on your home. However, before selecting such a payment plan, you need to assess your financial condition and decide whether or not you’ll be to afford the increased payments later on. Moreover, you need to pay a relatively high interest on such a mortgage repayment plan. The mortgage balance also increases after a few years as usually you don’t pay any interest for the initial years. So, after a few years, the unpaid balance may exceed the appraised value of the property.
- You can take help of mortgage calculators to compute how each of these mortgage repayment options affects your home loan in the long run.
Disadvantages Of Repayment Mortgages
- The most common type of mortgage is the repayment mortgage. In this mortgage type, the lender works out a schedule based on which the borrower has to pay a certain amount towards to the principal and certain amount towards the interest.
- If the borrower makes the payment each month on time, then the mortgage is cleared within a specified number of years. Usually most borrowers always opt for repayment mortgages because they are considered to the least risky option for the borrower. However, there are disadvantages of repayment mortgages which the borrower should know before opting for such a mortgage.
- Usually the amortization period for repayment mortgages are 30 years or 20 years. In the initial stages of the mortgage, most of the payments that you make monthly go to cover the interest. It is only in the last few years that the principal is covered. So, it is many years before you can build equity in your home or even make a significant reduction in the principal amount. However, there is a possibility of making additional payments over and above the monthly payments to reduce the principal.
- Repayment mortgages are very inflexible in terms of interest rate, payments and term of the mortgage. You cannot change the interest rate or the monthly payment in case you have any financial issues. Also, you cannot change the term of the mortgage unless you opt to refinance the loan.
- If you should sell the house a few years after taking a repayment mortgage, you will hardly have any equity in the house. Therefore, the amount you get after selling will go towards payment of the mortgage. So, people who do not intend staying in a house for too long should not opt for repayment mortgages.