6 Tips on How To Handle Mortgage Debt
8 MIN READ
Published April 07, 2023 | Updated November 10, 2023
If you're feeling the pinch of paying your mortgage debt, you aren’t alone. 3.45% of mortgages were delinquent in Q3 2022. This rate was three times higher compared to November 2019.
One of the main reasons homeowners find it challenging to keep up with mortgage payments is job loss. Other reasons that can impact your ability to pay a mortgage are medical bills, divorce, retirement, and too much debt.
Regardless of the reason, you can pursue several options to avoid financial hardship and foreclosure.
What Is Mortgage Debt?
In September of 2022, the average mortgage balance in the U.S. was $236,443. Mortgage debt is incurred when you borrow funds from a lender to purchase a house. This means that you’ll need to make timely payments towards your mortgage to retain ownership of your house.
Since most people can’t afford to purchase a property outright, they make a down payment and borrow the rest of the funds from a lender. You then make monthly payments over an extended term to pay off this debt.
Mortgages are secured debts, which means that when you don't pay your debt, you risk losing your property to cover the funds you borrowed.
How Homeowners Lose Control of Monthly Payments
While you may have had good intentions when you took on mortgage debt, things can change. Here are a few reasons why you may have lost control of your monthly payments:
- Rising mortgage interest rates: Large increases in interest rates over a short period have made payments more challenging for many homeowners. This situation becomes even more dire for those with a variable-rate mortgage as mortgage costs can skyrocket when adjusted.
- Increased inflation: The annual inflation rate in February 2023 was 6.0%. For many Americans, income has not kept up with the rising cost of living, making it challenging for homeowners to afford their mortgage payments.
- Excessive debt: Too much debt also makes repayments more challenging. Many homeowners rely on credit card debt and personal loans to keep up with expenses.
The key to ensuring that your mortgage debt doesn’t get out of hand is by recognizing the signs of financial challenges such as:
- Missing payments on utilities and bills.
- Finding yourself short on money for necessities.
- Relying on overdrafts, loans, or credit cards to get by every month.
- Experiencing stress over your financial situation.
How Mortgage Debt Can Affect You
Since mortgages are secured loans, your home is considered collateral. Missing payments means you're at risk of losing your home. Mortgage debt can affect you in a number of ways, and the possibility of losing your home is the biggest worry for any homeowner.
Having high mortgage debt can also make you more likely to experience financial hardship. You may have to forgo other bills to continue making mortgage payments. You may rack up credit card balances, especially if you're paying your mortgage with a credit card, or be forced to take out loans to get by. High consumer credit can quickly create a downward spiral.
Overwhelming mortgage debt can also impact your personal relationships. 54% of people believe that debt is a valid reason to consider divorce. Worrying over high household debt can mean you’ll have less time to focus on your relationships.
Mortgage debt also impacts your credit score. High outstanding mortgage balances mean you’ll have a higher debt-to-income ratio (DTI). A higher DTI impacts your ability to qualify for a loan, and missing mortgage payments can also negatively impact your credit report.
6 Ways to Get Help with Mortgage Debt
If you're facing job loss or financial hardship, many debt relief programs can help you manage your debt. Here are six options to consider:
1. Mortgage Refinance
Consider refinancing if your monthly mortgage payments are high because of the rising mortgage rates. Many borrowers opt for adjustable-rate mortgages because of the lower monthly payments, but once the fixed rate term is over and the loan converts to an adjustable rate, you may struggle.
Talk to your mortgage provider to see if there is a cap on how much your payments can rise during a fixed period. Explore options to refinance your mortgage to a fixed rate. Shop around for a new mortgage and compare features such as interest rates and repayment penalties before refinancing your mortgage.
If your financial situation is temporary, a forbearance agreement may help. Many mortgage lenders offer support for borrowers facing temporary setbacks.
With forbearance, you can temporarily defer your monthly debt payments. Once the forbearance period ends, you can resume making payments. You can also make extra payments if possible to keep your account up to date.
It’s important to remember that forbearance is available for the short term. You’ll need a plan in place on how you’ll keep up with your mortgage payments at the end of the forbearance term.
3. Loan Modification
A loan modification is another debt relief option to discuss with your lender. In some cases, your lender may be able to modify the repayment terms to make your loan payments more affordable.
Many mortgages are backed by the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation. If you have a mortgage from a qualified lender, it may be guaranteed by these government enterprises. This means your lender may be able to help you avoid foreclosure through programs such as the Flex Modification Program.
If eligible, your mortgage payments can be lowered by 20%. Under this program, your lender will first capitalize outstanding payments, lower your interest rate, and extend the repayment term for the principal balance once your loan is modified.
4. Sell Your Home
One of the fastest and best ways to get out of your mortgage debt is by selling your property and using the funds to pay off your total mortgage. For many homeowners, this is a viable approach if your current home value is more than what you owe.
If you purchased your home recently and have not built up enough equity, this may not be the right option for you. Or, if your financial problems are because of having too big a house, you can also downsize to reduce the amount of debt you owe.
5. Deed in Lieu of Foreclosure
You can voluntarily turn over the ownership to your mortgage lender and avoid foreclosure. If your lender agrees, you can hand over your deed in exchange for getting released from the mortgage.
In most cases, a lender will agree to this arrangement only if they are convinced that you will not be able to make payments. This option is fast and saves your lender the hassle of going through a traditional foreclosure.
The catch here is that if your home sells for less than what you owe, you may still be required to pay the difference.
6. Short Sale
If the current value of your home is less than the outstanding loan balance, a short sale can be helpful. With this option, your lender will agree to accept the price at which your house sells as the full payment on the outstanding mortgage. The remaining debt will be erased if your home sells for less than what you owe.
Once you opt for a short sale, consult with a tax professional to determine what you owe in case of deficits or capital gains.
If keeping up with your mortgage payments is challenging, reach out to your mortgage lender or a debt relief company. Help is available in many forms.
TurboDebt can provide you with debt relief through strategic planning, advising, and consulting services. Our knowledgeable counselors can help you find the right debt relief options and resolve the financial challenges you’re currently facing. Connect with us for a free consultation today.