Home Mortgage Refinancing Guide

If you’re falling behind on your mortgage payments and are concerned about losing your home, your first step in avoiding foreclosure is to learn how the process works. State laws regarding foreclosure vary widely; however, the rules in “Deed of Trust” States give your lender two options when foreclosing on your loan. Here are the basics you need to understand about mortgage foreclosure.

Deed of Trust vs. Mortgage

The difference between a Deed of Trust and a mortgage has to do with what happens if you default on your loan. If you default on your mortgage the lender must file in court to take your home when foreclosing. If you have a Deed of Trust instead of a mortgage, lenders are usually able to bypass the court when foreclosing. This makes the process less expensive and time consuming for the lender to complete. If you live in a “Deed of Trust” State your lender has the option of a judicial foreclosure (taking you to court) or using non-judicial foreclosure to sell your home.

There are currently fourteen states, including California, that rarely use “mortgages” to secure your home. Lenders typically prefer the Deed of Trust because foreclosure is less messy and expensive in these States. While a mortgage is a two-party agreement between you and your lender, a Deed of Trust involves a third party, known as the trustee. The trustee holds the title to your property and will initiate foreclosure if you default on the loan.

Non-Judicial Foreclosure

Non-judicial foreclosure involves a third party known as the trustee with the sale of your home. The trustee’s sale of y our home is less troublesome and expensive than judicial foreclosure because you cannot get your home back once the sale is final. The only advantage of non-judicial foreclosure for the homeowner is that if the sale of your home does not generate enough cash to cover your debt, the lender cannot come after you for any unpaid balance. This is why many lenders elect judicial foreclosure in Deed of Trust States even though it is a more difficult and expensive process.

Judicial Foreclosure

Taking you to court to sell your home allows mortgage lenders to collect on your debt after your home is sold at auction. Judicial foreclosures can be messy for lenders because you have the option of redemption after the sale of your home. This means you could potentially pay off what is owed on your hand reclaim title even after the lender sells your home. Redemption rights including the amount of time you have to reclaim title vary by State but can last up to two years.

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The “credit crisis” along with the predatory lending practices of companies like Countrywide Home Loans has left a record number of homeowners facing foreclosure in the United States. This is the first article in a series I am writing about avoiding foreclosure; if you’re a homeowner in trouble with your mortgage or have already received a foreclosure notice, I recommend subscribing to my RSS feed using the orange button on the left and register for my “Mortgage Secrets Newsletter.” Here is part one in the series of articles entitled “Avoiding Foreclosure.”

Most homeowners that are falling behind on their payments and are deeply in debt consider bankruptcy at one point or another. While bankruptcy will not discharge your mortgage loan, it will allow you time to restructure your debt and make it easier to manage. Chapter 13 Bankruptcy is designed to stop foreclosure on your home and protect your other assets. When your Chapter 13 bankruptcy petition is filed in Federal Bankruptcy Court, all foreclosure proceedings on your home stop instantly.

Chapter 13 results in an automatic stay that prevents your lender foreclosing on your loan. Your creditors are not longer able to harass you about missed payments or coarse you into a payment arrangement. There are requirements you must meet in order to qualify for protection under Chapter 13; you must for instance be a “wage earner” and show that you have a steady source of income to restructure your debts.

Chapter 13 bankruptcy is basically a repayment plan that allows you to make fixed payments for a number of years. This repayment plan essentially refinances your debts protecting your living expenses before your fixed payments are made. Your pre-bankruptcy debts including your past due mortgage payment are all included in this repayment plan. After making your bankruptcy petition under Chapter 13 you will be required to make all of your mortgage payments going forward in addition to your fixed payments.

Bankruptcy under Chapter 13 allows you 3+ years to catch up your debts; however, if you fall behind on your payments this court-ordered protection is withdrawn and your lender may resume foreclosure of the mortgage loan. Nearly two-thirds of homeowners that file Chapter 13 bankruptcy are unable to follow their repayment plans.

The advantage of filing Chapter 13 bankruptcy is that if you stick to your repayment play you may be able to refinance and/or sell your home. Remember, Chapter 13 bankruptcy is never a DIY project…if you are considering bankruptcy to avoid foreclosure you should consult a bankruptcy attorney to determine if Chapter 13 to stop foreclosure proceedings is right for you.

Is Refinancing Your Mortgage an Option?

Qualifying to refinance your mortgage means that you need sufficient income and credit to get a new mortgage loan. Refinancing your mortgage preserves your credit and allows you to keep your home. If you used a risky Adjustable Rate Mortgage and are concerned about the risk of payment shock when your lender adjusts your payment, refinancing could protect you. Keep in mind that refinancing your mortgage does not always result in a lower payment.

Suppose for example that you owe $150,000 on your home and refinance with a different mortgage lender. You will need to add your closing costs and broker fees to the balance of your existing loan to get the new mortgage. Rolling your closing costs and fees could result in a new mortgage balance of $157,000 or more. This could also result in a higher or similar mortgage payment even if you qualify for a lower mortgage rate. Keep in mind that if you are 60 or 90 days late on your mortgage payment refinancing may not be an option…this also true for homeowners with sub-prime mortgages or bad credit.

You can learn more about your mortgage refinancing options, including costly mistakes to avoid by registering for my free mortgage newsletter. Sign up today using the form in the upper left-hand corner of this page.