Unconventional Solutions for Keeping Your Mortgage Payment Manageable

In managing monthly expenses, you have likely noticed that the largest single monthly expense and one of the least changeable expenses is generally your mortgage payment.  Given the transaction costs involved in changing your mortgage payment (through house sale or refinancing), it is important to ensure that your mortgage payment is manageable relative to your monthly income.  But, what if you switch to a lower paying job or face some other decrease in income or increase in expenses that makes your mortgage payment difficult to manage?  Or, what if you end up buying a new house before selling (and obtaining the equity from) your old house, so you are forced to take out a larger mortgage than you can afford?  For these unusual cases, we offer the following tips.

Re-amortizing Your Loan. If your monthly mortgage payment is no longer affordable due to a change in circumstances (or if you simply have assets available and wish to reduce the total interest paid on your loan), one option to consider is re-amortizing your loan.  This is particularly advantageous (and may only be possible) if you have made pre-payments against the loan principal in the past and/or have assets that you could use to make a significant lump sum payment against the principal. 

How It Works.  In a re-amortization, you will generally have to pay a fee (e.g. $250 to $500) or have to make a large lump sum payment against the loan principal (e.g. $10k or $20k), and then the lender will recalculate your mortgage payment based on the amount still owed and the number of months remaining in the term of the loan.  This will result in a lower monthly payment, but the loan will retain the original maturity date.  (In contrast, if you pay extra against the principal but do not re-amortize, the monthly payment will remain the same but the term of the loan will be shortened.)

Other Options.  If a change in circumstances has made it difficult to cover your monthly expenses but you have sufficient assets to make a large lump sum payment against principal, another option is to keep your current mortgage payment but supplement your monthly income with withdrawals from your assets. This would likely be preferable if the change is temporary but of uncertain duration (e.g. unexpected job loss).  In that case, you would not want to make a lump sum payment to your mortgage company because, if you ended up needing the funds for other personal expenses, the mortgage company would not give it back.

Taking Out a Second Trust.  If you are facing the prospect of an uncomfortably large mortgage because you need to buy a new house before selling your old one, consider the possibility of a second trust.  Instead of taking out one mortgage loan, you could take out two–with the second loan being an amount that you could pay off in its entirety after selling your old home.  The graphic at right gives an example of how this would work.  Of course, there would be some additional up-front costs, but the lower monthly mortgage payment would quickly off-set those costs, assuming that the second trust is paid off in the short-term.

If you have questions about whether either of these strategies may be beneficial to you, give us a call and we can evaluate the details specific to your financial situation.