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Know Your Options: Forbearance or Refinance?

Posted On April 21, 2020

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Many Americans across the country are experiencing financial hardship due to coronavirus or Covid-19 related closures and shutdowns.  Federal, state, and local social distancing guidelines have left many workers temporarily furloughed or laid off.  The term “mortgage forbearance” has come up frequently on the news and also in the recently passed Coronavirus Aid, Relief, and Economic Security (CARES) Act. 

Forbearance, not to be confused with forgiveness, delays your mortgage payment for a temporary period of time, but still accrues mortgage interest.  Between March 16 and March 30, forbearance requests increased 1,896%.  Before you request mortgage forbearance, it’s important to understand forbearance allows you to pause your payments, but you will still owe them in the future, plus you’ll owe any interest accrued.  If you are able to make all or some of your mortgage payment, it’s important to keep paying it and talk to your loan servicer as soon as possible, if you suspect you will not be able to pay it in full. 

Forbearance is NOT Forgiveness

If you put your mortgage loan in forbearance, you will still have to pay it back, you just get a break in payments.  Forbearance is not loan forgiveness; you pay the amount missed after forbearance is over, plus all interest accrued. 

At this time, you may qualify for loan forbearance if:

  • You have lost your job.
  • You have suffered a reduction in pay.
  • You are sick and unable to work.

This is a developing situation, and these criteria are subject to change. 

Know Your Loan Servicer

Your loan servicer may not be the lender who originated your loan.  You can find out who your loan servicer is by checking your mortgage statement or payment portal and reviewing where you send your payment each month.  If you think you are going to be unable to pay your mortgage, contact your loan servicer right away.

Additionally, the Consumer Financial Protection Bureau provides this resource to look up who your loan servicer is, click here.

Forbearance is Not a Permanent Solution

Because of the unprecedented nature of the coronavirus pandemic, it’s too soon to tell when people are going to be able to go back to work.  If you find yourself still out of work and unable to make your mortgage payments after your forbearance period is over, you may need to request a loan modification.

A loan modification is a permanent change that could adjust the interest rate, extend the loan term, or defer the payments.  A loan modification is different from a refinance because it modifies the existing loan, it is not a new loan origination. 

How a Refinance Can Help

Many people are considering applying for loan forbearance, even when it may not be the best option for them. If you are still employed and are concerned with the future of your job, you should know all of your options. Assess which refinance programs you qualify for and see if there is one that is a good fit for you. A mortgage refinance may be a better choice than loan forbearance at this time.

Many refinance programs have the option for a 1- or 2-month break in payments, depending on when you originate the loan, and allow for limited cash back. If you refinance now, with today’s historically low interest rates, you could lower your monthly payment, increase your disposable income, and lock in a lower interest rate for years to come.   You may also consider a cash-out refinance, where you can use your home equity to cover some expenses during this time of uncertainty.

Before you apply for loan forbearance, especially if you are still working, know your options.  A refinance may be a better option to alleviate financial stress and get peace of mind through the life of your loan.  If you have any specific questions related to the coronavirus pandemic, visit our resources page at the top of our website. 

 

Sources: Loan.com, MarketWatch