One reason people file for bankruptcy is that they struggle to make their home mortgage payments. However, there are several strategies that a homeowner can employ to try to make their monthly bills more manageable before having to look to bankruptcy as an option.

Refinancing a home mortgage is one such option. Here are some reasons a homeowner may consider a home refinance and how it will help avoid bankruptcy. 

1. Lower interest rates: Interest rates move up and down and sometimes dip significantly lower than your mortgage loan. Refinancing the loan can lower the monthly payment enough to make enough of a financial difference to relieve financial pressure. While refinancing with a lower interest rate may reset the term on the mortgage, homeowners may be able to shorten the term based on the new rate.

2. Circumstances have changed:  Another reason to consider refinancing is that circumstances have changed the buyer profile. This may include improved FICO scores, a cleaner credit report, or an increase in the home’s market value. If the borrower’s profile has significantly improved since the lender wrote the original home loan, they may be eligible for a lower interest rate. 

3. New loan offerings are available: Sometimes, first-time homebuyers are forced to accept a less desirable loan product, as it is the only loan they qualify for. As the buyer profile improves – or if the market has gone up considerably – they may have more favorable loan options available to them. For example, many first-time home buyers only qualify for an FHA loan, but several years later may be eligible for a conventional loan with a lower rate and no mortgage insurance.  

4. Reduce the loan term: Sometimes, a homeowner is in a good financial situation but thinks that things may change in the future – such as expecting retirement in 10 years. They may decide to pay off the loan more quickly to avoid financial problems in the future by aggressively paying down the mortgages. Shorter terms involve less interest, and homeowners can own their homes sooner.

5. Increase the loan term: Conversely, homeowners concerned about their financial health may choose to refinance to lengthen their loan term. While this method will increase the overall amount of interest paid over the life of the loan, the monthly payments will be more manageable. 

6. Switch to a fixed-rate mortgage: An adjustable-rate mortgage (ARM) may be advantageous for many homeowners while rates are low, but as they rise, their payments do as well. In addition, it can be difficult to budget for a monthly mortgage payment when it keeps changing, so those looking to stay financially stable may prefer a fixed-rate mortgage. 

7. Get an interest-only loan: If a homeowner has significant home equity, an interest-only loan can improve monthly cash flow and ease some financial pressure. It may also free up cash to pay for other bills or utility payments. 

8. Cash in home equity:  Refinancing will allow homeowners with equity to take cash out of their home and use it to pay credit card bills or other high-interest payments. 

Each of these options has pros and cons associated with it, and homeowners should seek the advice of a financial advisor to learn more. 

If you have exhausted other options and need to explore the possibility of bankruptcy, call the attorneys at the law offices of Richard V. Ellis in Sarasota. We will discuss your options and help you make the best decision for your financial future.