COVID-19 has caused financial and job loss for millions of Americans, including tens of thousands of Vermonters filing unemployment insurance claims and wondering about their financial futures. For many, this includes worrying about how they can continue paying their mortgage—and continue owning their homes. Thanks to new federal legislation, accommodating lenders, and grant funding, there are several ways you can keep from falling behind on your mortgage amid the financial uncertainty of COVID-19.
Literally meaning “holding back,” forbearance is an agreement between you and your lender to put your mortgage on pause and avoid foreclosure on your home. It is important to note that this is not mortgage forgiveness, but rather a way you can secure your finances and use them toward other necessities.
Forbearance typically stops mortgage payments for a period of three months or longer. At the end of the forbearance period, the full amount of all missed and current payments are due in full as a “balloon” or lump-sum payment.
Forbearance was designed to serve as temporary assistance for instances such as the following—sudden financial hardship brought on by medical emergencies, natural disasters, or, say, a pandemic. It is not intended to solve high interest rates you can’t afford; in that case, you’ll work with your lender to find another solution.
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As with any lending agreement, it’s important to be aware of the forbearance fine print. For instance, interest still accrues during the months that your payments are paused.
As with many lending arrangements, there may be opportunities to change how your individual forbearance agreement is handled. Due to COVID-19, federally-backed mortgages, such as those financed by Fannie Mae, can receive forbearance for up to 180 days, depending on the extent of the hardship. Under the CARES Act, which has changed how we manage our health, work, and wealth, you can also request a 180-day extension.
While payments normally assume the form of a one-time payment covering the forbearance period, there are no set guidelines, even under the CARES Act. Different arrangements can be made—there may be opportunities to extend the forbearance period, set up a repayment plan, defer the payments, refinance missed payments so they become due at the end of the mortgage, or modify the loan to reduce the payment and extend the term.
When talking to your credit union or bank about forbearance, you’ll want to see what options they can offer and specifically ask what happens with your payments at the end of the forbearance period. Different lenders will have different approaches. Make sure you find an arrangement that will work for you.
Forbearance and deferment are often used interchangeably, especially during the current pandemic. In both cases, your mortgage payments are put on hold to provide you with temporary financial relief. Interest continues to accrue under both plans as well.
The main difference between the two terms is when those deferred payments are due. In forbearance, usually payments are immediately due at the end of the 90- to 180-day period. For deferment, the maturity date is extended and those skipped payments are tacked on to the end of your mortgage.
This can happen one of two ways. In rare cases, your financial institution may add your deferred payments to the end of your deferment period as a one-time balloon payment. Because mortgages rarely make it to their maturity dates—homeowners tend to refinance before then or pay their mortgage balance early—this deferred balloon payment ends up being included in the final balance payment or the total at refinancing.
More commonly, though, lenders will extend the maturity date on your mortgage. Instead of one lump-sum payment, those deferred monthly payments are shifted to the end of your mortgage. If you deferred your mortgage for two months, for example, another two months would be added to the length of your mortgage agreement. It’s as if your mortgage has been paused and will resume with the same number of monthly payments due after the deferment.
To reduce the potential hardship a large balloon payment could cause, it is recommended that you request that your lender extend the maturity date on your mortgage.
A loan modification is exactly what it sounds like—changes to the terms of your loan agreement.
A loan modification is an option if you are facing financial challenges and are already behind on payments. This option can help you get back on track when facing life events such as a divorce, illness, or other circumstances that impact your income.
Lenders consistently offer three general options for loan modifications:
- Extended loan terms. If you’ve already paid part of the principal and interest, your lender may stretch out the maturity date on your loan to lower your payments. For example, if you’ve paid 10 years of your 30-year mortgage, your credit union or bank may be able to extend the remainder of your loan back out to 30 years and spread 20 years of payments across an additional decade.
- Interest-only payments. Each loan has a specific accrual for interest charged to the principal. Your lender can break the costs down to charge just your monthly interest for a specified period of time, based on your financial situation. Your principal doesn’t change, but you won’t owe that interest afterward.
- Lowered interest rates. This is the least common option of the three. It tends to be used in instances where an individual’s income has changed or when a larger-balance loan is more severely delinquent, in which case the interest rate will have a greater effect on the payment amount.
And if these modifications don’t fit your needs, don’t be afraid to ask your lender about other potential options that may be more suitable for your individual situation.
While loan modifications can be an extremely helpful option to get your financial feet underneath you, they aren’t something you should get accustomed to. (You shouldn’t depend on any of these options when it comes to your mortgage or other loan payments!) As a general rule, lenders won’t offer them more than once per year or twice every few years.
With forbearance or another loan that requires payment to remain current (which means you aren’t behind on your mortgage), a repayment plan becomes an option.
Instead of requiring a one-time payment that you may not be able to make in a timely manner, your lender will work with you to break that repayment into manageable chunks. While these are additional payments on top of your existing mortgage, this longer-term plan is based on what you can afford over a certain period to help you avoid collection and bring your mortgage current.
Refinancing your home can lower your monthly payments and your current interest rate. Most homeowners will refinance 10 to 15 years into a mortgage to achieve more favorable terms during times when the Federal Reserve has lowered interest rates compared to when their mortgage originated.
This could be an option if you have a lower income due to COVID-19 (or other circumstances) and need to renegotiate a payment schedule that works for you, particularly in a lower-rate environment. If you have been laid off or furloughed and are without a consistent, long-term source of income, however, refinancing most likely doesn’t make sense for your situation.
Refinancing can also be less appealing because of the costs associated with a new mortgage. To apply for refinancing, you will need to pay for a new appraisal to determine the updated value of your home and you will also assume the usual mortgage closing costs. Unless you have equity in your home that allows you to roll these costs into your mortgage, this can end up being a more expensive option. In this instance, a loan modification may be more favorable and practical, as it does not include closing costs.
COMMUNICATION IS KEY
In real estate, it’s all about “location, location, location.” When it comes to working with your lender, it’s “communication, communication, communication.”
No matter which option seems best for you and no matter what your financial circumstances, the first and most important step is to talk to your lender.
While financial uncertainty can be overwhelming, you don’t need to feel trapped by a mortgage or other loan agreement that you signed when your financial circumstances were different. Your lender is your partner. You credit union or bank wants to work with you to find a solution to your financial situation. Your financial institution wants to help you fulfill your loan obligations so you can stay in your home.
Even in the middle of a pandemic—especially in the middle of a pandemic—you have options to keep up with your mortgage payments. Your credit union or bank is here to help.
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