What do you do when financial hardship hits and you can't make your monthly mortgage payments? This is a question on many homeowner's minds as nearly 17.8 million Americans are reportedly unemployed during the coronavirus pandemic.
When homeowners face financial hardship, such as the loss of a job, they often look to obtain a forbearance agreement from their lender. A forbearance happens when your lender grants you a temporary pause or reduction in monthly payments on your mortgage. Forbearance is not the same as payment forgiveness, in that you still have to pay the entire amount back by an agreed-upon time.
Mortgage lending institutions differ on their mortgage relief policies and qualifications; however, the Coronavirus Aid, Relief, and Economic Security (CARES) Act were signed into law in late March of this year to protect government-backed mortgages.
Federally backed mortgages include:
- Fannie Mae
- Freddie Mac
- The Federal Housing Administration (FHA)
- The US Department of Veteran Affairs (VA)
- The US Department of Agriculture (USDA)
Under the CARES Act, homeowners with a federally backed loan who either directly or indirectly suffer financial hardship due to coronavirus automatically qualify for mortgage forbearance.
Even if your mortgage is not secured by one of these agencies, you still can call and see if you qualify, as many lenders will still offer the option in order to avoid foreclosures.
Under the CARES act, homeowners can claim mortgage forbearance due to financial hardship from COVID-19 for up to 12 months without requiring any documentation or verification. During the forbearance period, mortgage lenders cannot charge late fees or penalties.
Additionally, as long as your mortgage is current at the time you claim forbearance, the lender is required to keep reporting your mortgage as paid current throughout the entire period.
At the end of the forbearance, the CARES act protects consumers from having to make a lump sum payment. Instead, you will be given a repayment plan from your provider. Since repayment options vary, it's important you ask your provider about all of your repayment options.
Possible Repayment Options:
You may be eligible for a loan modification at the end of your forbearance. With modification, the mortgage terms are changed in order to add payments that were missed during the forbearance onto the end of the loan, extending the term.
Another option that may work for some is a reduced payment option. This allows you to keep paying monthly payments at a reduced amount. The amount missed is usually added back into the monthly payments at the end of the forbearance.
Regular payment: $1000 per month
Reduced payment: $500 per month
Payment after forbearance period: $1500 (until caught up)
Balloon payments, or lump sum payments at the end of the forbearance, are prohibited under the CARES Act. However, mortgage lenders may require homeowners who are not protected under the CARES Act to make a balloon payment at the end, so again it is best to check first with your provider.
Mortgage forbearance should only be considered in true financial hardship. In other words, just because of the pandemic, you should not take a forbearance on your mortgage if you can still afford your payments. Likewise, if you are able to start making payments before the forbearance period is up, it's best to do so as soon as possible.
The Next Steps:
Before you get in touch with your mortgage servicer, save time by gathering as much documentation about the mortgage as you can. Also, be ready to list your income and monthly expenses. Due to an influx in calls, financial institutions are experiencing extremely long wait times right now, and having your information at the ready will help.
Have questions ready to ask. Here are some questions you should be asking:
- What fees are associated with the forbearance?
- What are all the repayment options available to you at the end of the forbearance?
- Will you be charged interest during the forbearance period?
If your forbearance is approved, make sure to keep all documentation pertaining to it. Make sure to cancel any automatic payments to the mortgage during the forbearance period, and keep tabs on your credit report to make sure your lender doesn't report the loan as unpaid.
For more information on forbearance, contact your lender and discuss your options. If you need more assistance with understanding your options, you can contact a local agent for the housing counseling agency, or call their hotline at 1-800-569-4287.
When you take out a loan for a car, charge something to your credit card, or get a personal line of credit, there is going to be an interest rate that applies to your loan.
A lot of different factors go into what you will be charged, including your own personal credit score. But even those with flawless credit still see a minimum charge that they can't get around. That all goes back to the Federal Funds Rate.
One thing consumers rarely realize is that all of our banks are lending money to each other every night. Banks are legally required to maintain a certain percentage of their deposits in non-interest-bearing accounts at the Federal Reserve to ensure they have enough money to cover any withdrawals that may unexpectedly come up. However, deposits can fluctuate and it's very common for some banks to exceed the requirement on certain days while some fall short. In cases like this, banks actually lend each other money to ensure they meet the minimum balance. It's a bit hard to imagine these multibillion-dollar financial institutions needing to borrow money to tide them over for a bit, but it happens every single night at the Federal Reserve. It's also a nice deal for those with balances above the reserve balance requirement to earn a bit of money with cash that would normally just be sitting there.
The Federal Reserve
The exact interest rate the banks will charge each other is a matter of negotiation between them, but the Federal Open Market Committee (FOMC) (the arm of the Federal Reserve that sets monetary policy) meets eight times a year to set a target rate. They evaluate a multitude of economic indicators including unemployment, inflation, and consumer confidence to decide the best rate to keep the country in business. The weighted average of all interest rates across these interbank loans is the effective federal funds rate.
This rate has a huge impact on the economy overall as well as your personal finances. The federal funds rate is essentially the cheapest money available to a bank and that feeds into all of the other loans they make. Banks will add a slight upcharge to the rate set by the Fed to determine what is the lowest interest that they will announce for their most creditworthy customers, also known as the prime rate. If you have a variable interest rate loan (very common with credit cards and some student loans), it's likely that the interest rate you pay is a set percentage on top of that prime rate that your lender is paying. That's why in times of low interest rates (it was set at 0% during the Great Recession), a lot of borrowers should go for fixed interest rate loans that won't increase. However, if the federal funds rate was relatively high (it went up to 20% in the early 1980's), a variable interest rate loan may be a better decision as you would be charged less interest should the rate drop without the need to refinance.
The federal funds rate also has a major impact on your investment portfolio. The stock market reacts very strongly to any changes in interest rates from the Federal Reserve, as a lower rate makes it cheaper for companies to borrow and reinvest while a higher rate may restrict capital and slow short-term growth. If you have a significant portion of your investments in equities, a small change in the federal funds rate can have a large impact on your net worth.
Whether you're leaving a job involuntarily, departing for something new, or just want to prepare for the unknown, it is smart to understand all your options regarding your 401k.
Frugal gifting often gets a bad reputation. However, this shopping method does not make you cheap — it makes you practical. Frugal gifts often avoid waste and overspending and can be just as meaningful (if not more so) as any other present.
With the National Retail Federation predicting each consumer this holiday season to spend upwards of $1,000 on holiday gifts amidst an economic recession —this year might be the perfect time to reconsider your spending budget. We've formulated the ultimate list of frugal gift-giving ideas to get you started.