A home loan is a great way to own your own home. Almost everyone takes home loans to purchase a home because paying for a property upfront can be difficult and require a lot of savings. Data shows that there were around 22.7 million home loan applications in 2020.
While loans can get you your dream house, managing the loans can be challenging, especially when you are in a financial emergency. However, you can manage your home loans in several ways so they don’t get out of control.
In this article, we’ll explore options for managing home loans during financial emergencies so that you can feel more confident in paying them off while staying on track with your financial goals.
Keep Panic Minimal
It is easy to panic during financial emergencies and make decisions that will eventually hurt you in the long run. However, there’s nothing to panic about. Financial distress is a part of your life, and you are not alone. Many people face financial problems. According to American Psychological Association (APA), 72% of US residents feel stressed about their financial condition at some point.
Regardless of the amount of financial trouble you are facing, avoid panicking and doing these things:
- Do not borrow from friends or family. Instead, focus on finding a solution by researching online or speaking with a financial counselor. If you are already in debt and cannot pay down your debts quickly, only take out loans if necessary.
- Do not sell your valuables. If possible, avoid selling your belongings just to get by until things improve financially.
- Another thing to avoid during an emergency is borrowing money from lenders with high-interest rates. This could lead to problems paying back these loans later on down the road.
Make Part-Payments Against Your Loan
Make a part payment if you find it challenging to make the monthly EMI payment. How much should you pay? It depends on how much the interest-free period granted by banks covers your outstanding balance. So before making a part payment, check that out. You can do this by logging into your account or calling your bank representative and asking them to email you this information.
When should I make my part payment? Try doing so at least three days before the deadline for paying off the EMI falls. In case something comes up and prevents you from spending that amount in time, it gives time for other avenues, such as seeking help or taking another step towards resolving the issue at hand before going back home without having made any attempt at all.
Refinance Your Loans
Refinancing your loan is one of the best methods to reduce debt burden in the long run. Most banks offer a variety of refinancing options for customers. Refinancing can be done by increasing the tenure or reducing EMI by changing loan rates and EMIs. You can also refinance loans taken previously but with different banks or lenders.
Refinancing refers to restructuring your existing home loan with a new lender at an existing facility value (LTV), wherein you get a fresh sanction and repayment schedule on account of a change in interest rate scenario or increase/decrease in property valuation, etc. All this is subject to eligibility criteria and assessment parameters adopted by respective lenders at any time.
You can either get refinancing from your existing lender or a new one. However, you need to be smart about when to refinance. When deciding to refinance a mortgage, consider the current interest rates, how it will affect your installment payments, etc.
Here are some scenarios when deciding to refinance a mortgage can be an excellent option:
- Obtain a lower interest
- Shorten mortgage term
- Increase mortgage term
- Get funds to pay for something else
Know the Various Loan Schemes by the Government
There are many government home loan schemes. For example, there are first-time homebuyers (FHA) schemes, veterans schemes, homeownership vouchers, etc. These schemes can help you buy homes with a decent interest rate. However, because of their simplicity, many prefer loans from private lenders and mortgage companies.
Public trust in the government has remained low for almost the entire century. According to Pew Research, only 20%, or 2 in 10, Americans trust the government. The reason for not getting help from the government loans scheme is that the process is tricky. However, if you can take the burden, the government can offer you the best rates for housing.
Keep a Separate Fund for EMIs
There are two ways to manage your home loan in a financial emergency.
First, keep a separate fund for EMIs. This will help you avoid defaulting on your loan and save money simultaneously. When you cannot make the EMI payment for any reason, you can use this fund to pay off the EMI immediately without having to worry about missing out on it.
Second, consider refinancing if needed to make your monthly payments affordable again. While refinancing might initially result in higher EMIs, it reduces long-term costs by lowering interest rates and the principal amount payable over time.
Make a Bigger Down Payment to Reduce EMI
You can reduce the EMI by increasing your down payment and reducing the loan tenure. When you make a more significant down payment, you are not required to make monthly installments for such a long period. This will reduce the interest rate on your home loan and, therefore, decrease your EMI.
While bigger down payments can be beneficial, they are not a necessity. People fear that they would require large down payments and avoid buying a home. According to research by Lending Tree, 41% of people who have never bought a house think that they need a 20% down payment to become eligible for a mortgage. Hence, they don’t think of buying a house.
However, the truth is that people can also get a mortgage by paying only a 10% down payment. While 20% is ideal, you can still apply for a loan if you only have a 10 or 15% down payment. The primary reason for going with a big down payment is to save on the interest rate.
Now that you know the various options available, you can make the right decision for your financial condition. The best way to avoid loan defaults is by making small but regular payments toward your EMIs. If you are having trouble paying off your debt, you must contact a lender immediately so they can help solve the problem before it gets any worse.