If you are worried about having missed a few mortgage payments or you are dealing with the stress of losing your home because of credit card or other debts, as a home owner you do have options. They key is to find a solution that will deal with all of your debts and help you manage your finances so that you reduce the likelihood of the bank foreclosing on your home.
The first step is to divide your debt into two categories: secured and unsecured.
Secured debt is attached to an asset, like your house. Your mortgage or a line of credit secured by your house is secured debt. If you don’t pay a secured debt, the lender can take their security (your house).
Unsecured debt is not secured by an asset. Examples would include credit cards and unsecured bank loans. If you don’t pay these debts the lender cannot automatically take your house; they would require a court order to take any such action.
With that background, here is our guide to debt relief for home owners.
Review Your Mortgage Terms
You should begin with a review of your secured debts. It’s not in the your banks best interest to simply foreclose on your house without attempting to make payment arrangements with you if you are unable to meet your mortgage payments and will likely default. Approach your lender about adjusting the terms of your mortgage to help. You can talk about three possible options:
- Deferring a payment or two. Many mortgage agreements have a clause that will allow you to defer one or two payments in the event of a temporary cash flow problem due to a job loss or illness for example. Be sure you put away the savings to help you keep afloat during the next few months.
- You can also talk about an interest rate reduction if you think current rates are lower than when you applied for your mortgage. You will have to do the math. Unless your mortgage is up for renewal, you will have to compare how much you will save by opening your mortgage early with any penalties that may apply.
- Ask to have the term of your loan extended. If your current mortgage payments are based on a 15 year amortization (how long it will take to fully pay off your mortgage) extending the amortization to 20 years can lower your monthly payments. Be aware however that while this might make meeting your mortgage payments easier each month, you will pay more interest over time.
If you have unsecured debts, apply any savings you make by re-negotiating your mortgage to paying off these debts. If you don’t you’ve just saved cash flow, but haven’t done anything to eliminate your debt overall.
Deal with Your Unsecured Debts
For most home owners it’s not the mortgage payment that’s the problem; it’s all of the other debts. Sometimes dealing with your credit card or other unsecured debts can mean you will be able to stay on top of your mortgage payments and keep your home. Don’t let credit card debt put your home at risk. It might be time to look at your credit card and other unsecured debt relief options.
This step is risky, but if in addition to your mortgage you also have high interest rate unsecured debt, like balances owing on credit cards, you may want to talk to your lender about consolidating those debts into a second mortgage. Of course this will only work if you have sufficient equity in your home, you are current on your mortgage payments and you have reasonably good credit.
The reason we say that this step is risky is because you are really just swapping one form of debt for another. You aren’t really paying down debt. Here’s where the added risk comes in: If you continue to build more unsecured credit after having rolled in your old debt, you could end up with even more debt to deal with.
If you are unable to pay your debts overall, you may need to file a consumer proposal to deal with your debts. Fortunately, in a consumer proposal you don’t lose your house, so it is one option to deal with your unsecured debt so you can afford to keep your home.
Keep Your Expenses Under Control
Being a homeowner is great, but it’s important to keep your housing costs under control so you don’t become “house rich” but “cash poor”.
It’s also important to review your overall budget. Begin by preparing a 30 day spending journal to track where you are spending your money on a daily basis. Look for things you can eliminate or reduce to create some extra cash flow to put towards debt repayment. Next look at your fixed monthly and annual costs. Can you find enough savings to help you keep your home if that’s what you really want. Just cutting back on your cable and phone bill could mean the difference between making or missing your mortgage payment next month.
Should You Consider Selling Your Home?
If you think your mortgage is unaffordable in the long term and you can’t renegotiate better terms with your lender, you might want to consider selling your house and buying a smaller house, or renting for a period of time. This is a difficult decision, but it may be one worth considering if it can significantly reduce your monthly expenses. Start by investigating other housing options. Also, talk to your lender about any costs associated with paying off your mortgage early or reducing the size of your mortgage.
Don’t Be Afraid To Ask For Help
I meet with people every day who are in financial trouble and are looking for debt relief but want to find a way to save their home. It is possible, you have a lot of options that you can choose. My advice is to talk to a professional debt advisor. Since all the debt counsellors at MoneyProblems.ca offer a free consultation, why not contact us today. We’re here to help.