4 ways to protect your mortgage from a job layoff
The current economy has cost many Americans their
jobs. Many others have suffered pay cuts because their employers
reduced their working hours. Some people worry that more layoffs
and pay cuts are on the way.
This all adds up to a lot of homeowners who are worried
about making their mortgage payments. The quicker they act, the
more options they have. Among the options are:
- Buying less house than you can afford so
you'll be able to make payments when money gets tight;
- Getting a home equity loan or home equity line
of credit to create a rainy-day fund;
- Refinancing the house for more than is currently
owed and pocketing the difference (known as a "cash-out refi");
- Working out a deal with your mortgage lender to
make partial payments or even suspend payments for a short time.
The first three options are for people who still
have jobs. The last option is for people who are unemployed or who
have suffered a big, indefinite pay cut -- someone who works at
a tourist destination and depends on tips, for example.
Borrowing below your means
"Let me tell you what I'd do," says Stuart Gans, president
of Lend USA, a mortgage brokerage in Bedford, Texas. "I got
a 30-year mortgage but I could have had a 15-year. But I gave myself
the option of a lower payment."
Gans doesn't expect to be unemployed anytime soon.
But he works in a business that has its boom and bust cycles, and
he has protected himself somewhat from the busts by giving himself
room to make higher-than-required payments on his mortgage during
good times. Then, if his income drops, he makes the required payments.
Here's an example of how it works. These aren't Gans's
numbers, but hypothetical amounts that roughly correspond to what
Americans could expect to pay:
Someone with good credit and ability to pay 20 percent
down on a $180,000 house might be able to get a 15-year mortgage
at 6.1 percent or a 30-year mortgage at 6.6 percent on a $150,000
loan. Monthly principal and interest on the 15-year loan would be
$1,274. Monthly principal and interest on the 30-year loan would
A home buyer who makes good money might be able to
make the $1,274 monthly payments to qualify for a 15-year mortgage.
But if the buyer worries about income security, he or she could
get a 30-year mortgage and make payments as if it were a 15-year
mortgage -- in other words, pay $1,274 a month instead of the required
$909. Paying more than the required amount builds up equity and
effectively shortens the length of the loan. Every extra payment
chops time off the 30-year term of the mortgage.
A homeowner who follows this plan could lower his
or her payments by $365 a month, to $909, when money gets tight.
Using your house as a bank
If you have a lot of equity in your house, you could get a home
equity loan or a home equity line of credit and use the money
as a rainy-day fund.
This tactic has a big drawback: You can lose your
house if you can't make the payments on a home equity loan or line
of credit. On the other hand, if you were unemployed and paying
your bills with an unsecured credit card, you would risk losing
the card if you couldn't pay, and your credit report would take
a severe hit, but you would still have a house.
If you take out a home equity loan to create a rainy-day
fund, or get a home equity line of credit to tide you over in event
of job loss, you don't have to spend the money. You can just keep
it in reserve in case you need it.
Another way to liberate money from the house is to
do a "cash-out refi," refinancing
the mortgage for more than you currently owe, and pocketing
the difference. For example, if you owe $75,000 on a house worth
$150,000, you could refinance the mortgage for $100,000 and get
a check for $25,000.
"That's what we're thinking of doing,"
says a Fort Worth, Texas, homeowner who is married to an executive
with American Airlines. Her husband survived a round of layoffs
in the aftermath of Sept. 11. They had applied for cash-out refinancing
before the terrorist attacks, and were set to close later in the
But after the round of layoffs, they decided to delay
their closing for two reasons. Most importantly, they wanted to
take advantage of falling
interest rates. They also wanted to take some time to assess
job security and rethink their financial goals. Should they pay
off other debt with the cash they get back (as they originally planned),
or save it in case of a layoff?
It's a lot easier to refinance a mortgage or to get
a home equity loan or home equity line of credit when you have a
job. If you're out of work, lenders are going to wonder how you
intend to repay your loan. Married couples who both work have an
advantage here over singles -- if one spouse is laid off and the
other still has a job, they still can try to refinance.
"They could get a stated-income loan where
you don't verify income," Gans says. He adds that if you time
a refinancing just right, you could end up skipping a month's payment.
If that's what you want to do, let the lender know, because the
timing has to be impeccable: "You've got to be savvy and know
what you're doing."
Talk to your lender
Don't wait until your checking balance has dwindled before contacting
your lender. Call immediately.
"Our goal is to help them stay in their
home," says John Lawrence, head of borrower counseling services
for Wells Fargo Home Mortgage. "The sooner they call the better.
If you ignore the situation or hope it's going to correct itself,
it's only going to get worse for you."
How do things get worse? Consider this: If you're
30 days late with your payment, or if you send a partial payment
without notifying the lender first, you'll get socked with a penalty
fee and your late payment will be reported to credit bureaus.
On the other hand, if you work out an altered payment
schedule with your lender, it might waive any late fees and it won't
report your problems to credit bureaus.
The point about credit bureaus is important for job
hunters. When you apply for a job, the employer probably will check
your credit report to find out what kind of person you are: whether
you have been sued, have filed for bankruptcy or have trouble paying
bills. You don't want any recent blemishes on your credit report.
In addition to waiving late fees, mortgage lenders
might accept partial payments for a few months. If your case is
especially woeful, you might be permitted to skip a payment or two
Wells Fargo calls these options "loan modifications."
After your financial situation improves, the bank will restructure
your loan to get you back on schedule.
Other lenders offer similar programs. Washington Mutual
even allows homeowners who lost loved ones in the Sept. 11 attacks
to suspend mortgage payments for up to a year.
Lenders are willing to help jobless borrowers because
they don't want to foreclose on houses. "It's a financial loss
for everyone involved -- for the investor, the customer and the
servicer," Lawrence says, adding that borrowers' problems are
factored in as a cost of doing business.
"Situations happen where people run into
difficulties," Lawrence says. "You lose your job, your
child gets sick -- we know that happens and we deal with it every
Where to call
OK, let's say you applied for your loan at a mortgage broker, which
found a good deal with a credit union, which then bundled your mortgage
with others and sold the package to investors. On top of that, the
servicing rights were sold to yet another company, which accepts
your payments and handles your escrow account. Who do you call?
Simple. Look for the customer service phone number
in your coupon book or on your monthly statement.
Before you call, take a look at your finances and
figure out how much you'll be able to pay every month. You don't
want to commit yourself to paying 75 percent of your usual payment
when you can afford to pay only 50 percent.
And remember: Lots of people have been laid
off and many others have had their work hours reduced. You're not
the only one.