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Forbearance of a Mortgage and Skipping Mortgage Payments

It is important for you to know the ramifications of skipping a mortgage or other loan payments before you stop making scheduled monthly payments. This will have an effect on your future mortgage payments and knowing upfront will help you budget for the future.  In the wake of the Covid19 crisis, New York and California are requiring mortgage lenders to offer forbearance to homeowners, Fannie Mae has also issued guidance for homeowners who may be struggling to pay their mortgage.

Q: What does forbearance in mortgage payments mean and how do I pay it back?

A: Forbearance is when a bank, or mortgage servicer agrees to pause payments for a specific period of time with an agreement to either pay it back over a set period of time in the future, or extend the term of the loan. For example, if you pause $4,800 in payments, your lender might agree to paying it back in equal installments for a period of 12 months once payments resume. In this example, your mortgage payment would increase by $400 per month until the money is paid back. The second option allows the lender to simply extend your mortgage term to make up for the skipped payments. For example, if the original term of your loan was 30 years (360 months) and you have made 5 years of payments (60) months, you have 25 years or 300 months left. If you skip 3 payments, you will now have 303 months left.

Commentary: I believe it is most likely lenders will require repayment through installments rather than extending the term of your loan. It’s important for you to understand what your agreement is with your lender before you pause payments. Determine if you have the ability to make larger payments once resumption of payments begin. I hope mortgage servicers will extend the term, but I don’t believe this is likely. Whatever the agreement is, get it in writing before you stop paying your mortgage, and as always, communication and proper planning is key. If you believe you may have difficulty making your April payments, contact your lender now. All mortgage servicers are required to have departments that address consumers who are having difficulty making payments. Visit this site often, it’s the agency that governs everything related to protecting the consumer. https://www.consumerfinance.gov/

Q: How will this affect my credit?

A: As stated in Bank of America’s announcement as well as Governor Cuomo’s recent directive, they have stated derogatory information will not be reported.

Commentary: This is great news, but I caution you to get any agreement in writing and put it in a safe place for the future. I would suggest reviewing your credit report three months after you resume payments to ensure late payments weren’t reported. DO NOT wait until the next time you apply for credit only to find your score dropped significantly. This will affect the rate you pay on future mortgages, auto and personal loans, and new credit cards. Visit this site, there are many imposters on the internet, make sure you are pulling your credit through the official site. https://www.consumer.ftc.gov/artic…/0155-free-credit-reports

Q: Does this mean I don’t have to pay the interest back?

A: NO, nothing is free. You will need to pay your lender back.

Q: What about my escrow payments for taxes, homeowner’s insurance, and mortgage insurance.

A: When you pause payments, you are also delaying payments to your escrow account which is paid monthly and allocated for future payments when your quarterly taxes are due to your city/town or when your insurance renews annually. This will throw your escrow account out of balance. Your mortgage servicer performs an escrow analysis annually (remember the statement you get each year that a mathematician couldn’t figure out, yes that’s the one). When this analysis is completed, you can expect your monthly payment to increase to bring the account back into balance. You may choose to make one payment, or spread it out over one year.

Commentary: This is another reason why it is critical for you to understand the impact of skipping payments. You must be informed now so you don’t experience undue financial stress in the future. I realize many will experience loss of income and will have no option but to skip payments. Don’t panic, rather plan ahead. Begin planning now, if there is any silver lining to the shut-down, we are not out spending on dining out, buying goods, etc. Create a budget now and learn where you can cut expenses. Google “budget template” and find one that works for you.

Q: Should I find a way to make my mortgage payment rather than accepting forbearance?

Commentary: This is a tough one, not all situations are the same but if you have an emergency fund and are comfortable that it won’t be exhausted with more vital expenses (Food, medicine, heat/electric) than I would encourage you to make your scheduled payments. If you can borrow from a family member, this is probably a better option as well. Most employers allow emergency 401k loans, check with your human resources dept. or custodian and see what your options are. Most Custodians, Fidelity Investments for example, provide this information online. I’m not a financial advisor and even if I was, it is virtually impossible to give a blanket answer that will apply to your situation. My best advise is to think this through and as mentioned above, plan properly and communicate with your lender.

Q: Is There another way for me to skip mortgage payments?

A: Yes, if you refinance your mortgage, you will skip the payment in the month following your closing and your lender can even structure the loan whereby you won’t have a payment for two months.  Of course, you need to determine if it makes sense for you to refinance.  If your interest rate is at or above market rates, then it might make sense to refinance into a new loan.  You may also consider consolidating liabilities to lower your monthly payments and increase your monthly cash-flow.  It’s important to review your mortgage lender’s closing costs and make sure you will lower your interest rate by enough to make up for paying closing costs.  A good mortgage lender can review with you and determine your best options.  Mortgage closing costs may be financed into the new loan so you can achieve this with no out of pocket expense however, most mortgage lenders will require you to pay for an appraisal in advance.

Q: How with the affect me if I pause payments on a home equity line of credit, or loan?

A: A home equity line works like a credit card, typically the minimum payment covers the interest that accrues each month. It is likely your Bank will simply tack the interest due onto the remaining balance. Your balance will go up resulting in a slightly higher payment, but your bank is not likely to require you to make up for the missed payments. If you have a closed end home equity loan (not a credit line), the result will be similar to skipping a mortgage payment however, it may be more likely that the bank will extend the term of the loan rather than require payments be made up over the course of 12 months.

Q; What happens if credit card lenders allow me to pause payments, will my future payment increase?

A: Yes and no, not in the same way as a mortgage, interest will continue accruing during the time you stop making payments thereby increasing your outstanding balance. In this sense your future payments will go up modestly just as they would anytime your balance increases. You will not need to make up for the skipped payments in the same way as with a mortgage or installment loan.

Commentary: Again, I suggest you get this in writing and review your credit report in the future to ensure there are no late payments reported.

Q: What about auto, student, and personal loans.

A: It is likely the missed payments will just be tacked onto the term (extending the term of the loan). I do not believe you will be required to increase your payment to make up for the skipped payments.  Update: the government has frozen interest from accruing on student loans (I still believe missed payments will be tacked onto the term of the loan)