Mortgage Forbearance: Proceed with Caution!
The coronavirus outbreak has left many Americans dealing with reduced income or unemployment. Many of your have heard about Coronavirus Aid, Relief, and Economic Security (CARES) Act, which allows lenders to provide mortgage relief options to affected homeowners.
One such option is mortgage forbearance. It is an agreement you make with your lender that provides relief from your payments. “Skip up to 12 payments with no hits to your credit!” is all that the public sees right now. However, there is a lot more to it than meets the eye, and I’d like to discuss a few of the most important items that could affect you for years to come.
If you or someone you know is in financial dire straits, then forbearance could be a good viable option. My concern, however, is that a lot of people will be going after a seeming “freebie” that they do not truly need just yet, only to kick themselves later for doing it. Here are my two cents:
- We are dealing with banks here – pragmatic institutions that are not usually known for their charitable nature. Multiply your monthly mortgage payment by 12 – whatever that number is, they’re going to get it back – one way or another. At the end of forbearance, you start making your payments again – a larger payment than what you were making. The banks will spread out your missed payments over a pre-determined term, but they will still make you pay every cent.
- Mortgage rates are expected to come down significantly as our economy slows down. Not necessarily right away, but at some point before the end of 2020, when mortgage markets normalize and there is less uncertainty. If you’re in a forbearance, you will not be able to refinance and take advantage of these low interest rates. Once your forbearance term ends, lenders are very likely to impose a number of regular mortgage payments made before you are allowed to refinance. You may well have to “rebuild your payment history” to become eligible. Just an opinion as of right now, but I would expect it to happen with almost 100% certainty, based on my 16 years in the field. It is also very likely that a ‘Forbearance’ notation on your credit report will result in significantly higher interest rates for you on car loans, student loans and credit cards for years to come.
- Lastly, you are relying on lenders not to report missed payments or late payments during your forbearance period. This is something that they’ve agreed to do, in theory, but quite a few will duly report every missed or late payment. The result will be a ruined credit history and a long uphill battle between you and credit reporting companies in order to remove these payments.
Please do not hesitate to contact me at any time with any questions. I hope that everyone is staying safe and healthy during these difficult times.