Over the past decades, the total number of mortgages has been on a steady rise. In 2020, mortgage debt reached an all-time high at $10.3 trillion. Notably, the count of accounts under forbearance or deferral surged by 102%.
This trend highlights the challenges numerous homeowners have faced in maintaining their mortgage payments in recent years. If you're finding it tough to keep up with your mortgage payments, worry not. There are several options available to help you regain your financial footing.
Among these options, two stand out: forbearance and deferment. Although often mistaken for one another, they differ significantly. Let's delve into the distinctions between them, so you can make informed decisions about your mortgage.
A mortgage forbearance is an agreement made between a mortgage lender and a struggling borrower that allows the borrower to pause their mortgage payments. The agreement hinges on a lender not exercising their legal right to foreclosure on a delinquent mortgage for an established period of time. At the end of this predetermined period of time, the borrower will be required to pay the total debt that has accumulated from not making payments.
The timeline for a forbearance can vary depending on the lender and the specific circumstances. Some forbearances might only last for a single payment or a few months, whereas others can last longer than a year.
Mortgage forbearances were extremely common during the early stages of the coronavirus pandemic. The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020.
The $2.2 trillion stimulus bill was designed to make it easier for struggling homeowners to be given a forbearance. These forbearances were granted to millions of Americans to prevent them from being evicted and their homes foreclosed.
Not having to make a mortgage payment is an easy way to save a lot of money. The average monthly mortgage payment in the United States is a few dollars shy of $1,500.
Being able to keep this money in your bank account can be a lifesaver, especially during periods of financial hardship. The problem with forbearance is that they don’t last forever. Eventually, the bill will come due, and you’ll be on the hook for every missed payment.
In order to bring your mortgage back to its current status, you would need to pay off the principal on every missed payment along with any applicable interest, taxes, or insurance.
A six-month forbearance with the average mortgage payment would end up as a $9,000 bill. That’s not counting any other penalties or charges that might be applied. Considering that 51% of Americans have less than three months’ worth of emergency savings, it might be impossible to pay off this debt in one lump sum.
Fortunately, there are a few options for forbearance repayment:
A repayment plan is probably the best option for paying off a forbearance debt. However, that will largely depend on whether or not you've recovered from your initial financial hardship. Your mortgage lender will increase your monthly minimum payment until the debt is repaid. This could also extend the amount of time it takes to pay off the full balance.
Although you may be eager to pay off a forbearance balance sooner rather than later, don’t rush into an agreement that you can’t afford. Keep in mind that the monthly payment increase is determined by the time given to pay it back. Although you may be eager to settle the debt quicker, the longer the span of the repayment, the lower the monthly obligation.
If you owe $9,000 to your lender, then a three-month payment plan would require an additional $3,000 on top of your standard mortgage payment.
Pushing for a 12-month repayment plan would lower this increase to $750 per payment. While that might still be a challenge to meet every month, it’s much easier than tacking on several thousand dollars.
There will probably be some paperwork involved to officially seal this agreement. Make sure that you’re aware of any additional interest charges or administrative fees before signing.
Making a few changes to your mortgage agreement from time to time is fairly common. If you have racked up a huge forbearance balance, it might be a good idea to modify your mortgage. A mortgage modification is similar to a repayment plan but with a few extra steps.
When asking for a loan modification, you can talk with your mortgage lender and have them factor in your forbearance balance to the rest of your mortgage. So if you were to owe $9,000 and have 20 years left on your mortgage, then your monthly payment would only increase by $37.50 a month.
Another option would be to add a few years onto your mortgage and lower the payment hike even more. In this scenario, adding ten years to your mortgage would only increase your payment by $25 a month.
You should keep in mind that adding time to your mortgage will greatly increase the total interest that you’ll pay. Adding to your mortgage might save you some money in the short term, but it will probably end up costing you significantly more in the long run. Keep in mind that a modification typically does not solve the entirety of any financial struggles. Many homeowners fall back into trouble after undergoing a modification since they have other active debts.
The fastest way to get your mortgage back on track is by a standard reinstatement. This option tends to be one of the hardest for people to achieve because a reinstatement means that you pay off your forbearance balance in one lump sum.
If you have the funds to pay off your total balance, then you should do so as quickly as you can. You don’t want to have a lingering debt complicating your mortgage. Paying off the forbearance balance will put an end to your stress and prevent any additional costs from compounding.
Sometimes a forbearance isn’t enough time to get back on your feet. If your finances are still a little bit shaky after the forbearance ends, it might be a good idea to ask for an extension.
The economic ramifications of the coronavirus pandemic will be felt for years and possibly even decades. Lots of homeowners haven’t regained their financial footing yet and might not for some time. While it’s best to pay off a forbearance as soon as you can, rushing to pay it off before you are ready can be a mistake.
It’s important to remember that an extension only kicks your problem down the road a little further. Eventually, the forbearance balance is going to come due. The longer that your forbearance is extended, the more that you’ll need to pay off in the future.
Deferments are very similar to forbearances; they are often confused with one another. In fact, deferments are sometimes used to pay off a forbearance balance.
The first stages of a deferment are pretty much the same as a forbearance. A mortgage lender will allow the homeowner to stay in the home despite failing to make their monthly payments. The key difference comes when this period of lapsed collections ends.
The end of a forbearance means that you are not on the hook for the total balance due. You could create an arrangement with your mortgage lender, but they are not obligated to even entertain your request. A deferment, on the other hand, is much more flexible when it comes to repaying.
The lender might require you to repay the amount over time by increasing your monthly payments. However, a lot of times, the deferred payments are simply tacked on to the tail end of the mortgage term. In other words, if you have a 20-year mortgage remaining and you missed six months of payments, your mortgage term length would now be 20 years and six months.
There have been a ton of new mortgage relief programs created as a result of the coronavirus pandemic. Many of these programs use the terms forbearance and deferment interchangeably. Using these words synonymously definitely doesn’t help to clear up any confusion about their true definitions.
It’s true that they have much in common, but forbearance and deferment are two different things.
There are two critical differences to keep in mind before you agree to one over the other:
Under normal circumstances, missing a mortgage payment can have a pretty huge impact on your credit score. Making payments on time is the biggest factor that affects your credit score, so missing even one payment can hurt. Even with near-perfect credit, a payment that’s late by more than 30 days can drop your credit score by as many as 100 points.
Whether or not forbearance or deferment damages your credit score depends upon how the lender reports it to the credit bureaus. In some instances, they may not be reporting missed payments to the credit bureaus.
You will want to make absolutely certain that this is part of the agreement before signing anything. A forbearance might keep you in your home, but if it destroys your credit, then you might want to seek another option instead.
Forbearance and deferment are two of the most popular options for mortgage relief, but they aren’t your only choices.
These are a few other methods for paying your mortgage when you’re struggling financially:
Working with a company like Balance Homes will come with more flexibility compared to a traditional financial institution. For example, Balance has no minimum credit score to qualify.
The way it works is that first, Balance Homes will pay off the remaining balance of your mortgage, including any liens or deferred balances. Balance provides the opportunity for homeowners to access additional cash from their equity so homeowners can consolidate debt and get caught up.
Balance co-owners have ongoing access to a portion of their home equity to avoid setbacks while their credit recovers. By maintaining your home equity and taking these proactive steps, Balance believes we can help you rebuild your credit and financial health — and create your path back to traditional homeownership.
Refinancing your mortgage basically means that you are taking out a new mortgage to pay off your current mortgage. It might sound redundant, but this is a fairly common tactic for people who have a higher credit score than they did when they took out their mortgage.
The idea is that you would have a lower interest rate on your mortgage, so payments would be lower. You could also add a few years to the mortgage term and lower your monthly payments even further. There are several factors in play to determine how effective this option can be for you.
The problem is that a refinance is that there’s a minimum credit score requirement and it will usually take a few months to complete. If you are currently struggling to maintain your mortgage payments, you might not have enough time to refinance.
Falling behind on your mortgage can be an extremely stressful experience for a homeowner. Every day that passes will put you one step closer to the worst nightmare of a homeowner: foreclosure.
If you are struggling to make mortgage payments, talk to your lender about a forbearance or deferment. Ideally, you should ask for a deferment first as they are a little easier to manage.
An even better solution is to talk with Balance Homes. By entering into a co-investment, you will have the opportunity to stay in your home and restore your finances.
Get a free proposal from Balance today and see if they are the right fit for you.
Sources:
How Forbearance & Deferred Payments Affect Your Credit Score | Equifax
How Does a Late Payment Affect Your Credit? | NerdWallet
What's the difference between mortgage forbearance and deferment? | Business Insider
Deferment Period Definition | Investopedia
51% of Americans have less than 3 months worth of emergency savings | CNBC
What Is the Average Monthly Mortgage Payment? | The Balance
CARES Act Mortgage Forbearance: What You Need to Know | Consumer Financial Protection Bureau
Mortgage Forbearance Agreement | Investopedia
Mortgage Debt Sees Record Growth Despite Pandemic | Experian
