Introduction
Purchasing a home is likely to be the biggest financial burden that most people will undertake in their lifetimes.
However, when medical emergencies, job loss, natural disasters, or any other circumstance arises that makes it difficult to make regular mortgage payments, there is an alternative called mortgage deferral.
We will look at what mortgage deferral is, how it works, and whether, in fact, you can just about wish to skip a payment without making yourself skip a mortgage payment.
Knowing the process and implications can help homeowners make informed choices regarding how they should work through times of financial hardship.
Mortgage deferral, for instance, is also known as a skipped payment or deferral. It is an agreement between a borrower and a lender to temporarily pause or decrease mortgage payments.
Skipping payments, in theory, sounds excellent; however, reality tends to prove otherwise because the skipped monthly payment often is not forgiven but rather put on a backburner.
The key objective of mortgage deferral is to temporarily the down payment and alleviate financial hardships. Mortgage deferment may prevent loss of a home due to foreclosure or severe ramifications for a mortgage account from failing to make payments.
What Is Mortgage Deferral?
When you forego a payment under a mortgage deferral, your lender amends the terms of your loan. Generally, this means:
1. Deferral Agreement: The lender agrees to allow you to suspend or decrease your payments for a set period, often a few months.
2. Accumulation of Payments: The deferred payments are added to the current mortgage balance due, added to the total mortgage principal during an extended loan term, or the total mortgage amount due at the end of the deferral period.
3. Interest Accrual: Interest continues to be added to loans even when payments are deferred unless otherwise agreed upon. This means you may pay more over the life of the loan.
For example, if you defer three months of payments, those payments might be added to your principal or you may have to pay them out in a lump sum later on.
Reasons to Consider a Mortgage Deferral
These are the situations in which mortgage deferrals come as a savior.
1. Lay Off/Income Cut: Loss of a primary source of income certainly presents a heavy burden on monthly repayments.
2. Medical Emergency: High medical bills and illness really bother one’s finances, and repaying mortgage might take a back seat.
3. Natural Calamity: Floods, hurricanes, and the like can disturb the flow of income and present additional burdens on one’s pocket.
4. Economic Downturns: Broader economic conditions, such as a recession, may lead to widespread financial instability.
Can You Really Skip a Mortgage Payment?
The idea of “skipping” a payment during a deferral can be misleading. While you’re not required to pay during the deferral period, the missed payments don’t disappear—they’re simply delayed.
Here’s what you need to know:
– No Free Ride: You still pay for the payments, no matter how long they’re pushed back.
– Lump Sum vs. Extended Loan: Some lenders may demand that you pay a lump sum of interest portion of the previously deferred amount at the end of current mortgage term or the deferral period, while others may even extend your loan term to fit the missed payments.
– Interest on Interest: You may continue to be charged interest on the deferred balance, which can further add to your total cost on the loan.
– Translation note: You’re not the money by skipping payments entirely; you’re rearranging when and how you’ll make them instead.
Qualification for Mortgage Deferral
Qualification for mortgage deferral hinges on your lender’s policies as well as your financial situation. Several factors come into play, including:
1. Evidence of Hardship: Generally, lenders demand proof that one is struggling financially, as evidenced by loss of income or the onset of unforeseen expenses.
2. Loan Type: Some loans, for example government-backed mortgages, may have their own special deferral programs.
3. Payment History: Individuals who have a sound repayment history stand a better chance of receiving deferral options.
Benefits of Mortgage Deferral
1. Temporary Reprieve: A deferral offers short-term relief giving you the much-needed space to pay for your pressing expenses.
2. Protection from Foreclosure: Deferring payments helps you stay in your house and saves your credit score.
3. Flexible Options: Most lenders tailor deferral plans according to one’s needs and extend flexible support during tough times.
Disadvantages of Mortgage Deferral
1. Interest Accrual: Most deferral agreements allow for the further accrual of interest on the amount deferred, making the amount owed greater.
2. Lump-Sum Amounts: Some lenders insist that the fully deferred amount be paid in full after the deferral period, which might not be financially viable for you.
3. Long-Term Additional Costs: Keeping your loan term longer or increasing your balance could mean having to pay more interest in the long term.
4. Potential Credit Impact: If not managed correctly, deferred payments may still appear as missed payments on your credit report.
How to Apply for a Mortgage Deferral
If you think a mortgage deferral might be right for you, here’s how to start the process:
1. Contact Your Lender: Reach out to your mortgage provider as soon as you anticipate experiencing financial difficulties.
2. Explain Your Circumstance: Provide evidence of your distress, such as your unemployment proofs or medical bills.
3. Read the Terms: Understand how the payments in arrears will be addressed, including interest that may accrue or payment needs.
4. Sign the Contract: You have to make sure you understand everything before you sign, including repayment timelines.
Alternatives to Mortgage Deferral
If deferral is not an option, there is the following:
1. Loan Modification: Permanent alterations to the terms and conditions of your loan, making them easier to pay.
2. Refinancing: The lowering of the interest rate or the period of a loan to reduce monthly payments.
3. Forbearance: Like deferral, but with a greater emphasis on short-term hardship with repayment plans.
4. Sell the house: If things are not going to get any better financially, selling may be your only way out before the foreclosure happens.
Impact of Mortgage Deferral on Your Credit
Though skipping a mortgage payment, deferral itself doesn’t necessarily hurt your credit score, it may pre-date with the payment default. Only make sure that the deferment is documented with the life of your mortgage lender and not just a mutual understanding so that there is no dispute later that may hamper your credit score.
Is Mortgage Deferral the Right Choice for You?
Making the decision to defer your mortgage payments takes much thought and consideration of your financial situation as well as terms available in the deferral. Ask yourself:
Can you afford to resume payments after the deferral period?
How do you feel about the accrued interest or lump-sum payment impacting your budget?
Are there other options, including refinancing or loan modification?
Tips for Managing a Mortgage Deferral
1. Understand the Agreement: Know the repayment terms, including how deferred payments will be handled.
2. Budget for Repayment: Plan ahead for the end of the deferral period to avoid financial strain.
3. Maintain Communication: Stay in touch with your lender to ensure you’re meeting the terms of the deferral agreement.
Conclusion
While mortgage deferral provides some needed relief when going through hardship, you must understand the terms and long-term implications. Skipping a payment does not mean you get out of it-it is essentially a restructuring of your obligations.
By explaining your situation to your lender and exploring your options, you can find what’s best for your circumstances and go on to maintain financial stability and peace of mind during these tough times.
