Mortgage forbearance is not a long-term solution
May 19, 2021
I think it’s time we talk about something important: mortgage forbearance. More specifically, I think it’s time to talk about why mortgage forbearance is not a long-term solution to a financial problem. Finally, let’s talk about some other, better options if you’re having trouble making your mortgage payments.
What is mortgage forbearance?
Mortgage forbearance has been making the news for the past year or so, essentially since quarantine started. At its most basic level, mortgage forbearance means a homeowner is not currently making payments, but the bank is not actively pursuing foreclosure proceedings.
At the beginning of the pandemic, the government enacted a moratorium on foreclosures, along with evictions. The downside? There wasn’t much guidance beyond that. There’s honestly very little clarity on how this forbearance is supposed to work. Lenders were left scrambling with no idea how to best proceed.
We don’t need to talk about the positive or negative to that, by the way. Like most policies, it had both upsides and downsides. At the end of the day, it was probably necessary. But now we have to deal with the fallout.
At present, about 2.5 million homeowners are still in mortgage forbearance.
Not to be an alarmist, but that’s not a good thing!
What’s wrong with mortgage forbearance?
In a nutshell, what are the consequences?
Do you know?
That’s the problem. I can’t answer that. Most people can’t.
Forbearance isn’t a refinance. You haven’t opened a new, more affordable mortgage at a better interest rate with a lower payment. There’s no improvement in your ability to repay.
It’s not a partial claim mortgage or a loan modification. Your payments stay the same, and they’re not transferred to the end of the loan.
It’s not forgiveness. You definitely still owe everything you haven’t paid.
So let’s talk about your options.
Depending on your lender, you may have some reasonable options for working through the forbearance. In addition to paying a lump sum (which seems a little unfeasible for anybody who entered forbearance in the first place, right?), you may be able to negotiate repayment over an extended period of time, perhaps up to a year.
Additionally, some lenders are offering deferral, where you can pay the missed payments at the end of the mortgage term (or when the loan is otherwise closed, as in a refinance or sale of the home).
Finally, you may be able to pursue a loan modification, a formal procedure where the payments are added to the end of the loan term (and possibly lowered or otherwise made more affordable).
If you’re interested in these options, reach out to your lender or loan servicer! If you need help figuring out who that is, reach out, and we can help you.
But what about some other options?
What if I still can’t afford my mortgage?
Maybe you were already having trouble making your payments before the pandemic began, or perhaps your industry doesn’t seem like it’s going to bounce back as things start to re-open. What do you do now?
There are a couple options, and chances are they can work well, almost regardless of your situation.
If your income has dropped, but hasn’t completely gone away, you may be able to qualify for a refinance at a lower interest rate and more favorable payment amount. Today’s interest rates are still at near-record lows, so refinancing could be a good idea even if you bought within the past few years. Further, the increase in equity due to appreciating home values could knock off your PMI payment, depending on your down payment.
Think it may be time to refinance? Give us a call! We’ll be happy to walk you through your options and find a great program for you.
Further, a refinance will restart a loan’s term, meaning you’re spreading the remaining principal across a larger amount of time. This means a lower monthly payment, even if everything else remains the same.
Selling your home
If you’re willing to walk away from your home, there’s a good chance you can walk away incredibly well off right now.
Nationwide, there’s an extreme shortage in housing inventory due to a number of different circumstances. The stars have aligned to make the market impressively competitive.
In the process, home values have appreciated at an insane rate – to the tune of about 16% year-over-year.
That means even if you bought your home last year, there’s a good chance you already have enough equity in your home to cover the cost of selling your home, walk away from your mortgage, and return to renting while you regroup, all without financial harm to you.
If you’re interested in pursuing this option, we’re happy to walk you through a market analysis for your home, prepare a net-out, and give you an idea of what to expect at the end of the day.
No matter what
Regardless, the most important thing is to act now. If you’re one of the 5% of homeowners having trouble making payments or are behind on your mortgage, there are currently dozens of different solutions, each with its own merits and benefits.
There’s a possibility the foreclosure moratorium and forbearance will be extended, but it’s a risky proposition to leave your life in the hands of legislation. Let’s act now to find you a better, long-term, sustainable solution while you still have options and the space to make the right decision for you and your family.