Money Management

Reaching out to your lender should be your first step. 

It’s been a very difficult time to be an ordinary American homeowner as of late. If you bought a home in the last few years, you might be grappling with higher housing payments due to elevated home values. They climbed in the last three years during the COVID-19 pandemic as Americans changed their priorities and fled city rentals to buy homes in areas with more breathing space. The Federal Reserve Bank of St. Louis reports that the median sale price of a home as of Q4 2022 was $467,700; just three years prior, in Q4 2019, that figure was $327,100.

If you’re in the position of no longer being able to afford your mortgage loan payments, you’re likely panicking and wondering what happens now. I’ve been in your shoes before (thanks to getting laid off the last time I owned a home), and it’s something no one wants to experience, ever. Here’s what to do if you can’t afford your next payment.

Contact your mortgage loan servicer for options

Your first move in this situation should be to contact your loan servicer as soon as you realize you can’t pay your mortgage. It’s a smart idea to run through your costs and budget again ahead of that phone call to make sure you’re truly coming up short and haven’t overlooked a bit of money you could apply to the payment.

Your loan servicer has definitely heard from people in your situation before, and will have options for you to stay in your home (or not, if you decide you want to get out from under your loan). These will include forbearance programs, which can give you the chance to pause your loan payments with the understanding that you’ll make up what you owe later.

Another option might be a loan modification, which changes the terms of your existing mortgage to make it more affordable for you. The change could be temporarily lowering your interest rate or lengthening the term of your loan (say, going from a 15-year fixed-rate mortgage to a 30-year loan instead).

You might be able to refinance your mortgage loan to make it more affordable. If you signed your loan at a high interest rate, those extra costs could be contributing to your difficulties paying. As of this writing, the average interest rate on a 30-year fixed-rate mortgage is 6.12%, per Freddie Mac. While this is a far cry from the salad days of rates in the 3% range at the start of 2022, it might be lower than your rate, especially if your credit score wasn’t so good when you got your loan and you’ve improved it since.

If you wait, your options could be fewer

It’s important to reach out to your servicer before you fall behind, because if you wait, you could start the clock on foreclosure proceedings. If you are 120 days behind on your mortgage payments, you could find yourself forced out of your home as your lender takes it and sells it to recoup its costs.

Another less-pleasant (but still better than foreclosure) prospect is a short sale. I’ve been through this, and it’s the option for when you can no longer afford your mortgage payments and won’t be able to despite a loan modification, or need to get out from under the loan. The nice thing about a short sale is that you’ll incur less credit score damage than you would with a foreclosure, and in my case (and possibly in yours), I was given several thousand dollars as a seller incentive from my loan servicer.

How to avoid this situation

If you’re not currently struggling to afford your mortgage payments, you might be wondering how to avoid it in the future. It comes down to money, as many things do.

Make a larger down payment

This is a good way to avoid ending up underwater on your home loan, which is when you owe more on the home than it’s worth. If you can afford your payments and the market in your area just happens to be down, this isn’t a big deal unless you need to sell your home. If you begin your homeownership journey with more money sunk into your home loan, you might also get a lower mortgage rate, reducing your payments and keeping them more affordable.

Don’t buy more home than you can afford

If you’ve been renting for a while, it may be tempting to go all out on a home purchase. Resist this impulse and try to keep your total homeownership costs to less than 30% of your take-home pay to ensure affordability.

Save a solid emergency fund

A stash of cash in a high-yield savings account or money market account, amounting to at least three months’ worth of your necessary expenses, is one of your best financial friends. If you suffer a job loss, have a surprise bill, or encounter another need for money in a pinch, you can raid this account to avoid going into debt — or falling behind on your mortgage payments.

Many people have been in your shoes, and it’s not a happy place to be. If you talk to your mortgage servicer as soon as you realize you’re going to come up short, it will have options for you to get past this financial issue.

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Read this before trusting a home estimate you see online. 

If you are buying a property or selling one, chances are good you’ve looked at real estate websites. And most of these websites give you an estimate of what they think a property is worth.

It can be tempting to trust these estimates — especially if they make it look like the home you own is worth a lot more than you paid for it since that can seem like an attractive prospect. In my personal experience, though, I haven’t found them to be particularly accurate.

Here’s why I don’t really trust them anymore.

My anecdotal experience says the estimates are off by a big margin

I have sold several houses over the past decade, and I have bought several as well. I also really enjoy looking at real estate listings and following houses, so I’ve probably had hundreds of homes on “watch lists” over the past 10 years.

When I’ve listed my own house, purchased properties, or simply watched what the homes sold for, I’ve found a big discrepancy between what most online estimates say the properties are worth and what the final selling price is.

In the case of my house, for example, the online estimate was off by around 10%, which amounted to tens of thousands of dollars.

Now, this is just my personal experience — but actual data from some of the companies generating these estimates backs up what I’ve seen. When homes are not on the market, or when they are outside of major metropolitan areas, online estimates don’t tend to paint a very accurate picture of what a property is really worth.

Here’s the big problem with online estimates

The big problem with online estimates is they are typically generated based on publicly available data, such as comparable sales and public records showing what a home is worth. They can’t take an individual home’s quirks or unique characteristics into account, and sometimes the data may be outdated.

If a house has been improved and updated, for example, the online estimation algorithms have no real way of knowing that. Likewise, if a house has fallen into disrepair or has a much worse view than its nearby neighbors’, the online algorithm can’t really take this information into account very accurately either.

The accuracy of the estimates gets even worse in areas where there isn’t much turnover of homes, because this means there is not a lot of data on recent sales that the online estimators can use to determine a likely price.

Because of all these shortcomings, online estimates should be taken with a grain of salt. If you’re thinking about selling your house and an estimate you see on the internet shows you’ll make more than enough profit to pay off your mortgage loan in full, you should still get advice from an actual real estate agent in your area (or do a lot of independent research) to make sure your house is really worth as much as you think it is.

Whether you’re a buyer or seller, don’t let these estimates deter you from getting the information you need to make the best guess as to what a home is really worth.

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This unfounded concern could put you off budgeting for no reason. 

Making a budget is really important. Having a spending plan allows you to avoid going into credit card debt by living above your means. It also enables you to focus on important financial goals by budgeting to put money into your savings and brokerage accounts.

While it is important, many people don’t actually have a budget. And there are lots of reasons for that, including a fear about what budgeting means for their use of funds.

Concerns about budgeting are incredibly common and, in fact, finance expert (and budget proponent) Dave Ramsey even admitted he had some major worries before he got started with the budgeting process.

This was Ramsey’s biggest worry about making a budget

Since Ramsey is well-known for stressing the importance of budgeting in order to manage money wisely, it may come as a shock to hear that he had concerns about making a budget of his own. But, on the Ramsey Solutions blog, he admitted to having a big fear.

“I used to worry budgeting would mean I’d never have fun with money again,” Ramsey said, indicating that he was “a natural spender” who was hesitant to get started with budgeting out of concerns that doing so would restrict him from buying what he desired.

This is a very common concern many people share — especially since the budgeting process can feel like you’re setting restrictions on yourself and since some online advice around budgeting focuses on stripping the fun out of your life by cutting spending on things like your daily latte.

If you share this fear, here’s the reality

If you’re putting off the budgeting process because, like Ramsey, you’re concerned that a budget means the end of fun spending, then you may be missing out on making an important money management move for no reason.

The reality is, budgeting absolutely does not mean you cannot have fun with money. In fact, if you try to make a budget that deprives you of spending for pleasure, you’re just wasting your time because you will never stick to it.

The purpose of budgeting shouldn’t be to prevent you from spending on things you enjoy. Instead, the goal should be to make a budget that allows you to get the most value from your money. This means you absolutely should budget for important financial goals like retirement. But, you should also allocate money to the fun spending that gives you the most joy.

You can budget for whatever you want (within reason), whether it’s fancy shoes or a car collection or days out at the movies. You just need to be sure you’re meeting your important goals and making whatever sacrifices are necessary in less-important areas to afford the things that matter most to you.

By being smart about how you budget, you aren’t making it so you can’t enjoy money or so your spending isn’t fun. If you do it right, you can enjoy your money even more than you did before you had your spending plan.

As Ramsey explained, “Having a budget gives you permission to spend—guilt free!” So, put your fears aside and start making your budget today so you can spend on the things you love without worrying that doing so will jeopardize your future.

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Keep these expenses in mind if you’re buying an EV. 

Electric vehicles are becoming increasingly popular, with sales of electric cars rising year over year. While they might seem like an ideal choice for those looking to reduce their environmental footprint and save money on fuel, there are some hidden costs associated with electric cars that some may not be aware of. In a 2020 report from Consumer Reports, researchers found that owning an EV is less expensive over time compared to owning a gas-powered vehicle. But that’s only part of the story. Here are the hidden costs associated with buying and owning an EV to know about before you take the plunge.

1. Higher insurance rates

Insurance rates for electric vehicles are typically higher than those for gasoline-powered vehicles, due to their higher replacement costs if they’re damaged in an accident or suffer a mechanical failure. Plus, insurance rates may be higher based on type of car. The cost to insure a Tesla is higher than for most EV cars, and for its Model X, costs are almost double that of a gas-powered luxury SUV. Overall, you can expect to pay anywhere from 5% to 25% more on car insurance.

Research insurance premium costs ahead of time so you know what kind of additional expense you’ll be facing if something happens to the vehicle. Shop around and compare different insurance companies to find the best deal and see what insurance discounts you may qualify for.

2. Repair costs

While electric cars don’t require oil changes or other traditional maintenance like gasoline-powered cars do, they do require certain parts (like batteries) to be replaced periodically — and these parts can be expensive. JD Power found that repairs for EVs were 1.6 to 2.3 times higher than their gas-powered counterparts. Over the long run, EVs cost half as much to maintain than gas-powered vehicles, but you can expect to shell out more money for repairs.

3. High initial costs

Yes, the price of EV cars have gone down significantly, but according to KBB, the average EV is over $16,000 more than a gas-powered vehicle. The average price for a new vehicle hit a record high of $48,681 in November 2022. In comparison, the average new EV price was $65,041. Luckily, if your EV meets certain criteria, you may be eligible for a $7,500 federal tax credit. This can help offset the higher costs, but you still will be paying more upfront for an EV, leading to a higher monthly auto loan payment.

4. Higher registration fees

EV car owners have to pay a higher registration fee in many states. The amount ranges from $50 to several hundred dollars, depending on the size, weight, and type of EV you purchase. States charge a gasoline tax and to make up for lost revenue with EVs, 31 states charge an additional registration fee every year for both plug-in hybrids and electric vehicles.

5. Range anxiety

One cost that is often overlooked when it comes to electric cars is range anxiety — the fear that your car won’t have enough range to get you where you need to go without having to stop and recharge. Even though the range for EVs has gone up significantly, there is that concern you may not have enough miles left to get to your next destination. I own a Tesla and I live in an apartment with no chargers, so I have to rely on finding superchargers on the way to my destination.

Even with the superchargers, you have to find a conveniently located station, ensure there is a charger available, and spend the 15 minutes to charge your Tesla up to 200 miles. Range anxiety can lead people to spend more time charging than necessary, with some even deciding to buy an extra vehicle just in case they need to drive farther than what their EV allows. To avoid this pitfall, research the range capabilities of the car you’re interested in, how many miles a day you will drive, and how you will charge it.

Electric vehicles offer great potential for reducing emissions and saving money on fuel and maintenance over the long run, but there are some hidden costs associated with them as well. Prospective buyers should be aware of this before making a purchase decision. Range anxiety, maintenance costs, and higher insurance rates all contribute to the overall cost of owning an EV over its lifetime, but being aware of these potential expenses can help buyers create a budget for ownership and make sure they get the most out of their investment.

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As convenient as P2P loans can be, they are certainly not cheap. 

Peer-to-Peer (P2P) lending allows borrowers to avoid traditional financial institutions and instead, deal with investors who might want to finance their loans. P2P is a growing alternative to traditional lending institutions. P2P lending is growing at a rapid pace, and according to Acumen Research and Consulting, expected to achieve a market size of $804.2 billion by 2030.

How it works

Let’s say you have a great idea for a home-based business and need $20,000 to get it up and running. The problem is that your credit score is only so-so and you’re not confident that a bank will loan you the funds.

You go online to visit a P2P lending site and fill out a loan application, which will likely include a credit check. The lending site lets you know if you’re approved or not. If so, they’ll tell you what your interest rate will be.

In the investors’ hands

Using online software, the P2P site will match your application with potential lenders. And at this point, you sit back and wait as investors review your loan application and decide whether they want to fund it. An investor may fund a loan in its entirety or a portion of the loan amount. In other words, by the time investors have made their decisions, you may have money coming from several different sources.

Investor decisions are based on their goals. For example, one investor might want to play it relatively safe and loan as little as $25 to many borrowers. That way, their portfolio is a mix of higher-risk and lower-risk investments. The fewer risks an investor takes, the less they earn in interest payments. Other investors might go straight for risky loans in hopes of higher returns.

Repayment begins

If your loan is successfully funded, the money is likely to hit your bank account in less time than it would take a traditional lender to distribute funds. Now, it’s time to move on to the repayment stage. Just like a traditional loan, you’ll repay a P2P loan with regular monthly payments.

Each payment is divided between the various lenders. Let’s say one lender decides to fund $10,000 of the $20,000 for which you applied. That lender will get 50% of each payment. The remainder will be split among the other investors.

Upside and downside

The upside of P2P loans is that you may be able to get a loan that you would not otherwise qualify for. The downside is that you’re likely to pay a much higher interest rate than you would pay if you landed a loan through a traditional lender.

Before applying for a P2P loan, decide if you would be better off working to boost your credit score in order to qualify for a lower-interest loan.

Fees

There are costs associated with borrowing money through a P2P lending site. Some P2P sites include fees in the payments, while others require upfront fees of 1% to 8% or more. No matter how fees are built in, go over the loan contract with a fine-toothed comb before signing on the dotted line. Make sure you understand how much the loan is going to cost, including all fees and interest paid.

Ideally, the best personal loan is one that charges no origination fees and offers you a fair interest rate.

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What seems like a simple favor could come back to haunt you. 

It might seem like a reasonable request at first: A friend or family member tells you they don’t have the best credit, and they ask if you’d be willing to cosign for them on something that requires a credit check. That could be a loan, a credit card, or a rental contract, to give a few common examples.

This isn’t a decision to take lightly. Cosigning can be one of the biggest credit mistakes, so before you even consider it, you need to know about the potential drawbacks.

How cosigning works

When you cosign on a financial contract, you’re agreeing to be responsible if the primary applicant doesn’t pay. If you cosign on a loan and the borrower stops paying, you’re required to make payments. If you cosign on an apartment lease and the tenant defaults, the landlord can come after you.

The reason somebody would ask you to cosign is because you have better credit than they do. During the application process, the creditor will check both the borrower’s credit and the cosigner’s credit. If the borrower doesn’t have a high credit score and they apply alone, they might be denied or receive unfavorable terms, like a high interest rate. If you have excellent credit, then you could help them get approved.

The dangers of cosigning

Cosigning is a situation where you take on all the risk and get none of the reward. It’s the person you’re cosigning for who benefits. Here are the risks involved for you:

You’re equally responsible for the financial contract. If the borrower doesn’t fulfill their obligations, you’re on the hook.It could affect your credit score. When you’re a cosigner, that contract can be reported on your credit file. If the borrower defaults, it’s just as damaging to your credit as if you defaulted.It could limit your access to credit. Lenders consider your current debts, including from accounts you’re on as a cosigner, when deciding if they’ll approve you for loans and credit cards. So, if you’re cosigned on a large loan, that could prevent you from getting approved for a new loan or credit card yourself.It could affect your relationship with the borrower. Mixing money with friends and family can go very poorly. If you agree to cosign for someone, and anything goes wrong, it could make for an awkward dynamic and potentially ruin your relationship.

There’s really only one way that cosigning can go right, and that’s if the borrower makes all their payments without issue. On the other hand, there are all kinds of ways it can go wrong.

Maybe your friend isn’t good about making their loan payments on time. You start getting letters saying there’s a missed payment. That puts you in the awkward position of going into parent-mode with your friend, asking them why they haven’t paid on time and if they could please do it soon to get this lender off your back.

Here’s another thing to keep in mind: It’s not easy to get your name off a contract when you’re a cosigner. This usually requires a new contract between the borrower and lender. For example, with a loan, the borrower would likely need to refinance it. Otherwise, you’re on that contract for as long as it lasts.

Have a falling out with the borrower because they always pay late? It doesn’t matter. Even if you two aren’t speaking, you’re still the cosigner, and the one responsible for paying if the borrower doesn’t.

Should you ever agree to cosign?

Be extremely selective about cosigning on anything. You should only agree if you trust the other person and if you’re ready to pay off their debt to protect your credit score.

To be fair, cosigning doesn’t always backfire. But you need to consider how well you know this person and if you should even be putting yourself in this situation. You are, after all, putting your credit and financial security on the line. Even if you think you know someone well, you may not know how responsible they are with their finances.

The situation where it makes the most sense to cosign is if you have adult children who are working on their credit for the first time. It can be challenging to build your credit score from scratch. By cosigning on your child’s credit card or loan application, you could be a big help for them.

When you’ve worked hard on your credit, you don’t want to lose all your progress because of a mistake. Being a cosigner is one of those decisions that could have severe consequences. In most cases, it’s better to err on the side of caution.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
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