WHAT IS MORTGAGE FORBEARANCE?
Covid-19 has left many Americans struggling. Whether you have had your hours cut, lost your job or are having cash flow issues with your business, it can be a tough time to pay your mortgage.
Due to a recent bill that allows borrowers with a federally backed mortgage loan the ability to request loan forbearance, many homeowners are considering this as an option. Yet, before you request forbearance, it is important to understand exactly how it works and what it costs you.
What is mortgage forbearance?
Mortgage forbearance is when your mortgage servicer and you come to an agreement on a temporary payment plan. This is usually due to some type of hardship (such as job loss, home damage or illness). This is different from mortgage forgiveness as you will still have to pay the mortgage payment back at some point during the loan.
How to request mortgage forbearance or deferment
You will need to speak with your mortgage servicer and decide together on a plan of action. Some lenders have certain restrictions which means that it is better to call as soon as possible. Make sure that once you come to an agreement, you have this in writing, this will help protect you in the future.
A payment reduction forbearance is when your servicer reduces the amount of your monthly payment. This reduction is usually an agreed-upon amount between you and the servicer that allows you to continue making your payment without interruption. The part that has not been paid will still need to be paid, but you will be able to make up the payments over the next year.
At the end of the mortgage
Some servicers will allow you to stop paying your mortgage payment for the next 3 months and will add it to the end of your mortgage. This can be a good option for borrowers who have circumstances that may take a while to recover from. However, you will still incur interest on these payments, so you will end up paying more over the life of your loan.
Another common option for forbearance is a balloon payment. This is where you pause paying your mortgage for the next 3 months and make one large payment on your 4th month. This will combine all 3 payments you missed with your 4th monthly payment. This is a good option for those who need help temporarily and will be able to stomach such a large payment at once.
Before requesting mortgage forbearance, it is important that you understand your options. Often it makes more sense to refinance your mortgage than to put off paying your mortgage for a few months to be hit with a big payment later.