How To Avoid Foreclosure

Foreclosure is what happens when you miss too many payments. Foreclose is when the bank closes down your loan, and takes back your home, because it feels as though you are no longer capable or willing to honour your debt. Because a mortgage is secured by against your home, the bank is allowed to kick you out, and sell the home to cover the costs of the loan.

As a borrower, this doesn’t exactly make you very happy, because you’re credit score will be greatly harmed, and you’ll have lost the home that you’d been working on keeping for so long. However, there are a couple of tricks available to the savvy borrower that allows them to avoid foreclosure, even in the most desperate of situations.

One of the easiest ways to avoid foreclosure is to simply ask your lender for some extra time to re-gather your finances. In most cases, banks will allow as many as 2 skipped payments every year, because it is more cost effective for them to allow you to miss a payment then to go through the hassle of foreclosure.

While these payment holidays are handy, it’s important to remember that you interest will still compound on the skipped period, you will just not be required to make a payment on the loan for that month. What’s more, these holidays are entirely up to the discretion of the bank. If you are frequently asking for holidays, and are demonstrating other signs of default risk, the bank may begin to deny your requests.

Another handy product for you to take advantage is called mortgage insurance. While there are a variety of loan insurance amounts available, the most common one is called ‘payment insurance’. Payment insurance involves paying a small monthly insurance premium to protect against the credit risk associated with missing payments or defaulting on a loan. If you do miss a payment without pre-arranging a holiday, you will no longer get a hit to your credit score.

Another type of insurance helps protect you against any dramatic decreases in the value of your Home Equity, therefore making sure that you won’t be called up to post additional collateral in the event of a recession. Lastly, interest rate insurance helps you to protect against the risk that interest rates will dramatically decrease over the course of your mortgage, which helps you to feel more comfortable in locking in a fixed interest rate.

While all of these solutions are available for helping you to avoid foreclosure, it is important to remember that a loan is as much about your relationship with your bank as it is how much money you have. Sometimes it’s worth it to simply call up your lender in advance to ask what your options are. You’d be amazed at how willing your bank will be to work with you, so long as you are willing to work with them to make sure that everyone meets their respective goals.

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