Mortgage Payoff Guide | Understanding Mortgage Repayment

If you are falling behind on your monthly mortgage payments or are concerned that you may not be able to make them in the near future, consider a mortgage payoff plan. Putting a mortgage payoff plan in place as soon as possible can help you steer clear of damage to your finances, but it’s important to start the process and reach out to your lender quickly to avoid foreclosure and missed payments.

What is a Mortgage Payoff?

A mortgage payoff plan allows you to spread out the total amount of past monthly payments that you have missed into your upcoming future monthly payments over a set amount of months. The plan is worked out between you and your lender as an agreement so that you can pay back your missed payments and avoid foreclosure.

Avoiding Foreclosure With a Mortgage Payoff Plan

If you’re falling behind on monthly mortgage payments, you stand to lose your home through foreclosure, in which your loan is canceled and the property is seized by the bank in an attempt to recoup their loss on the mortgage. Foreclosure doesn’t just cost homeowners their home, but causes severe damage to credit scores, which can prevent future home purchases and inhibit the ability to apply for loans or to rent an apartment.

If you have fallen behind on your payments or fear that you will soon in the future, don’t worry: there may still be options to avoid foreclosure. The most important step to take is to act quickly. The legal foreclosure process can’t start before you have been behind on the mortgage for 120 days, so use that time to go to your lender and chat about your options.

Mortgage Payoff vs. Refinancing

Before you commit to a mortgage payoff plan, consider if a refinance is a better option for your financial situation. If you are eligible (and if you haven’t fallen behind on mortgage payments yet), you may be able to refinance into a better interest rate and lowered monthly payments that you can afford to make.

Qualifying for a refinance depends on your lender’s requirements but generally involves having good credit, a low debt-to-income (DTI) ratio, and at least 5% equity (or ideally more) built up in your home. Refinancing also comes with up to several thousands of dollars in closing costs, which vary by lender.

It might be hard to make a refinance work if you are already struggling to make monthly mortgage payments, but it’s worth discussing with your lender. As opposed to a payoff plan, which just redistributes missed payments into future mortgage payments, a refinance can help you get a better interest rate, a lower monthly mortgage payment, or can help you get out of paying monthly mortgage insurance fees.

Mortgage Payoff vs. Forbearance

You may have heard the term “forbearance” as an alternative way to avoid foreclosure. Forbearance is a mortgage payoff plan in which the lender reduces or suspends mortgage payments due for a certain amount of time. At the end of the term, the homeowner will be required to either pay the amount of missed payments in a lump sum or to pay larger monthly payments until the amount is paid off.

A mortgage payoff plan technically becomes forbearance if you are discussing a period of time where you worry you won’t be able to make payments. The difference between forbearance and a payoff plan is that in the case of forbearance, the lender has already agreed to a pre-determined period of missed or deferred payments before they occur (which is better than addressing payments that are already late). Be wary of a plan that requires you to pay missed amounts in a lump sum at the end of the forbearance period, since this could be hard to pay off on time. If you expect to get paid a large amount of money or a bonus from work, you may consider asking your lender to suspend mortgage payments until that time.

How Does a Mortgage Payoff Work?

If you are ineligible for a refinance or if you have already fallen behind on monthly payments, chances are that a mortgage payoff plan will be the best option for you. As we discussed, the crucial step to putting a payoff plan in place is to take action quickly. Because lenders need time to process your paperwork, it’s important to communicate your financial trouble as soon as possible. Being proactive and getting ahead of the issue also communicates to your lender that you want to keep your property and are motivated to continue paying off the loan.

Set up a time with your lender to explain your situation and go over options for a payoff plan. Expect to provide details of reasons that you lapsed on your payments, whether it’s from losing work or having other unexpected financial commitments. In addition, make sure to bring records of all of your financial information (credit score, income statements, and information on any other outstanding loans) so that they can begin the process of determining your eligibility as soon as possible.

If a lender is willing to accommodate a mortgage payoff plan, they will spread out the amount of missed payments or amount of payments that you think you may struggle to pay over a period of 3-6 months. Once you have successfully paid off the capital from those missed payments, your monthly payment will return to its original amount.

The Benefits of a Mortgage Payoff Plan

It’s hard in times of financial stress to pull together your financial information and talk to your lender, especially if you’re unable to make mortgage payments due to the loss of income or other unforeseeable life events. If you can act quickly and explain your situation to qualify for a payoff plan, however, you most likely will be able to work with your mortgage lender to avoid foreclosure. This will allow you to keep your home and ensures that your credit score won’t be badly damaged.

Using a Mortgage Payoff Plan

If you are behind on a mortgage payment or anticipate having trouble paying off your mortgage in the future, contact your lender. A payoff plan will help you get back on track to making regular mortgage payments and is somewhat flexible in terms of timeline and monthly payment amounts.


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This page last updated: March 21, 2022