If done carefully, a refinance can help you avoid a foreclosure. To lower your monthly payments to a more affordable level, you would need either a mortgage with a longer term, or a mortgage with a lower interest rate. In this position, there are a few steps that you should take to optimize your search.
The terms of a refinanced mortgage depend on the same factors as any other type of mortgage - your credit score, income, and any existing debt. The earlier you can act, the more options will be available. You will likely qualify for much lower rates before your credit score has taken a hit, and if you can still demonstrate the ability to make monthly payments.
Start With Your Current Lender
Your lender may agree to suspend payments for a “forbearance” period until you can begin making payments again, if your financial problems are short-term. If not, they may be able to offer you refinancing options - for example, if your interest rate is significantly higher than current market rates, the lender may be willing to renegotiate. The benefit of working with your current lender is that you usually can avoid certain fees at closing costs that were included with the first mortgage – title search, property appraisal, etc. It also may be in your lender’s interest to negotiate, especially if it means they will continue to receive payments.
Although refinancing your mortgage can be one way to avoid a foreclosure, it is not the only way. Depending on your circumstances, you may qualify for loan assistance programs – if still employed, for example, you may be eligible for the federal Home Affordable Modification Program. Federally-backed loans like VA loans and FHA loans offer their own programs. As a last resort, you might consider filing for Chapter 13 bankruptcy. This would require you to restructure certain debts and make monthly payments, but would allow you to stay in the property.