In an effort to remain above the crazed madness consuming the world, I will avoid my political views, and post something helpful and positive this month.
Many people have deferred payments on their house mortgage during this time of crisis. This may be a necessity for some, but one should consider all their alternatives before extending their loan. Try dipping into your savings, 401K, or borrowing from a relative or friend first. If you have an SSIIP at work, you can borrow off that, and then pay yourself back. Likewise, thanks to the CARES Act in March 2020, you can withdraw from your IRA without the usual 10% penalty if you, your family or your employment have been affected by Covid-19. A nurse -practitioner friend is calling the pandemic Covid-25, since everyone is gaining twenty-five pounds sitting at home.
Extending payment schedules only profits the mortgage lender, the bank, with additional interest paid. Refinancing is also more costly due to additional fees like appraisal, title insurance and document fees. Unless you refinance your current balance for a shorter period, say fifteen years, rather than thirty, you’re paying interest and balance you already paid once. Research showed that some mortgage lenders like Rocket Mortgage have a variety of loan schedules where you can repay your current mortgage balance during a tailored time period without extending you schedule too mach. This might be a preferred alternative to lower your rate, and payment, especially if they’ll waive the fees. Research Rocket Mortgage, since they’re the top on-line mortgage lender. With the money saved on your payment, you can pay ahead, and payoff your mortgage early. No more interest to the bank!
One may ask why listen to the advice on a blog of a writer. If you’re educated enough to do simple daily interest calculations, the math proves my point. It is simple logic you can do yourself. Before I began witting, I spent nearly twenty years in the mortgage services field, including mortgage sales and collections. I’ve had to explain and sell mortgages to hundreds of borrowers before they’d sign on the dotted line. What I’m writing is logical. Banks make loans to make money through the interest you pay on your loan. If you don’t pay your loan back according to the scheduled payments, banks make more money. You pay them more in interest by extending the time over which you pay them back.
The lending practice the bank used to lend you the money to purchase your house produced two legal documents to convey the title of your property. First, there was the mortgage which conveyed the property title to you and the lender. Second, there was the mortgage note which spelled out the loan terms ( number of payments, payment amount, interest rate, penalties for non-payment, and total payments) under which the loan must be satisfied for the mortgage holder to release their interest in the property title to you alone.
Historically (pre-pandemic), most conventional mortgage loans were set up on thirty-year payment schedules using simple-interest loans. A simple-interest loan is a loan where the interest payment is calculated daily based on the interest rate and the unpaid balance. The importance of this is that the greater the days you go without payment, the greater the interest charge, and the higher the unpaid balance the more that can be charged for interest. It is to the advantage to you, the borrower, to pay as soon and as often as possible to pay down the balance, and to avoid the interest charges. Obviously, this hasn’t been possible for many with so many out of work, struggling just to eat.
To portray the image of the helping friend and hero during this time of crisis, many of the mortgage holders announced that they’d defer past-due payments to assist their borrowers, and avoid foreclosure. If a borrower claims to be a friend, it is simply to make more money. Deferring a payments is not eliminating a payment. The lender is simply moving the payment down your payment schedule. In short, they are adding more days and interest charges to pay off your loan, making them more money.
Another resolution 0ften suggested or advertised is refinancing at a lower interest rate. While this may sound good, it’s just another way for a bank to make money. By refinancing, they’re often adding time to your payment schedule. If they’re giving you another thirty-year mortgage on a mortgage you’ve already paid down for ten years, you are losing those ten years of payments and paying them again. What lender wouldn’t want to receive their money twice? Of course the payments are lower. You already paid down the mortgage balance. Banks also make money by charging you fees to refinance. I would ask them why you should pay extra fees, effectively driving up your total payments and APR. They should waive all fees. There are many banks seeking your business. Shop around if you’re qualified.
The truth is all about money for the banks. The longer it takes for you to pay off your loan, the more interest they make. No bank wants to foreclose on a mortgage. The collection costs and risks are too great, losing them money. Best thing to do is to talk to your lender with the knowledge they don’t want to foreclose, and payment extensions make the lender money. Try to pay as much as you can, as often as you can. With the Democrats handing out money, you can use a stimulus check to pay ahead. Avoid the temptation of using the money to buy a new TV, or in the case of many of those in my in-laws’ small Illinois town, drugs.