Expecting trouble with mortgage payments? Are you considering mortgage Forbearance or Deferment as a tool to help?
If employment issues or other concerns are causing pressure for you with your mortgage payments, you may be wondering about the frequent media discussion concerning Forbearance or Deferment as a means of obtaining relief. But they are different mechanisms and homeowners should proceed cautiously.
Forbearance is traditionally different from deferment based upon interest accrual and repayment.
In a mortgage forbearance the interest almost always accrues during the forbearance period, and repayment of the amount is usually in a lump sum at the end of the forbearance period.
Example 1: The loan servicer allows you to stop making principal and interest payments for six months, which gives you a breather. But you have to pay everything back all at once when your payments are due again (and continue to make your regular monthly payments then, going forward).
Example 2: The mortgage servicer lets you reduce the mortgage payments for three months by ½ of the regular payment. After the period of time is over you have one year to pay back the amount of that reduction, including the interest that has accrued, on top of your regular monthly payments during that year.
Deferment, on the other hand, is typically where the lender will agree to defer prior missed payments or to defer some of the homeowner’s future mortgage payments. Interest sometimes but usually does not accrue during the deferment period, and repayment is usually made over time.
Example: The loan servicer agrees to pause your mortgage payments for six months, and that amount is repaid by either adding it to the end of your mortgage loan or by you taking out a separate, second loan.
The benefits? You bring your mortgage current immediately, and you keep your monthly principal and interest payment the same. The deferred amount does not accrue interest until it becomes due at the later time. This can be a better option than foreclosure.
The Take-Away? There is no “one-size-fits-all.” Get as much information as possible from the mortgage servicer before making an arrangement. Start early.
If you make your payments on time prior to commencement of a Forbearance or Deferment, the lender or servicer will still be required to report to the credit agencies that you are not delinquent with your payments. But, if you become delinquent before you start a relief program the lender or servicer may properly continue to advise the credit agencies that you are delinquent with your payments.
Consider all of your options. What are your expectations for your home? Do you intend to remain there? When do you anticipate re-starting your mortgage payments again? Have you considered all other options that may be available to you?
Most importantly, get all of the terms and be sure to review them with a mortgage professional or with your attorney before signing an agreement. And, if you do not expect to stay in your home for much longer, reach out to a real estate broker for input on selling your home.