If you’re going through financial hardship, you’re not alone. Due to the sharp rise in unemployment caused by the COVID-19 pandemic, many Americans are still in a tough predicament. To make matters worse, many are struggling to keep up with their mortgage payment each month. Some are entirely behind on mortgage payments. In this scenario, you might be wondering how to lower mortgage payment without refinancing or perhaps, how to pause it.
If you’re feeling this financial pressure, a mortgage forbearance agreement can offer you some temporary financial relief. However, it’s not the right option for everyone.
Below, we’ll explore the pros and cons of forbearance plan development to help you decide if it’s right for you.
What Is Mortgage Forbearance?
Mortgage forbearance is when your lender lets you pause or reduce your monthly mortgage payment for a set amount of time, known as the forbearance period. Once this period is over, you’ll have to repay your missed payments as a lump sum or in monthly installments.
In response to the COVID-19 pandemic, the federal government issued the Coronavirus Aid, Relief and Economic Security (CARES) Act. This act gave homeowners with government-backed mortgages the right to request a mortgage forbearance for up to 180 days (with the option to extend for another 180 days).
As of February 2021, 2.67 million Americans were actively in forbearance.
The Pros and Cons of Mortgage Forbearance
While a mortgage forbearance plan can offer some much-needed relief to economically-tight homeowners, it comes with pros and cons:
Pros of Mortgage Forbearance
Here are the benefits of mortgage forbearance:
- You get to avoid foreclosure – When you can’t make your mortgage payments on time, you risk facing foreclosure. Foreclosure occurs when your mortgage lender repossesses your home due to your failure to keep up with your mortgage loan payments.
Foreclosure has many serious, long-lasting repercussions. It can negatively affect your credit score for up to seven years. In addition, if you’re applying for a second mortgage with bad credit, it will be extremely challenging for you to get approved. Fortunately, a mortgage forbearance agreement protects you from foreclosure, at least temporarily.
- You can stay in your home – During the foreclosure process, you will eventually have to move out of your home. Thus, mortgage forbearance also ensures that you can stay in your home while you work on improving your financial situation. In such uncertain times, having the safety and security of your home cannot be understated.
- Extra time to fix your finances – You can’t always prevent financial hardship, but with time on your side, you may be able to overcome it. Forbearance gives you a grace period of several months to get back on your feet financially.
Cons of Mortgage Forbearance
While mortgage forbearance has many notable benefits, it also comes with the following downsides:
- You still have to repay your missed payments – Mortgage forbearance is not equivalent to mortgage forgiveness. You’ll have to set up a repayment plan and repay all of your missed payments at some point. If your financial situation does not improve during the forbearance period, you may struggle to afford these payments when they’re due.
- Your mortgage’s monthly payment plan could be too costly after forbearance – Before you enter into mortgage forbearance, it’s important to have a plan for how you’ll repay your missed payments when the forbearance period is over. A large lump sum or several months of higher mortgage loan payments could set you back financially all over again, especially if you’re not adequately prepared.
- It’s not meant for long-term financial problems – Mortgage forbearance is only meant to provide temporary mortgage relief for people struggling with sudden, short-term financial hardship. It’s not suited for homeowners who have a hard time paying their mortgage in general. If you simply can’t afford your mortgage, forbearance is not the appropriate solution. Instead, you should look for methods for how to get out of a mortgage entirely.
Is Mortgage Forbearance Right for You?
After considering all these pros and cons in mind, the choice is yours to make. If you suspect that your financial troubles are only temporary, mortgage forbearance may be a viable option. If you can’t afford your mortgage in general, you may want to explore alternative solutions.
What alternatives are there?
Mortgage forbearance isn’t the only way to get a reprieve from unaffordable mortgage payments. Another solution is a sale-leaseback program.
So what makes this option different when comparing a mortgage forbearance vs. sale-leaseback. Through a sale-leaseback, you can sell your house, convert your equity into cash and stay as a renter.
Once you’re in a stronger financial position, you can repurchase your home and take over your mortgage payments once again. Until then, you can use your home’s equity to keep you afloat financially during challenging economic times.
If you’re considering forbearance, there is a lot to know beforehand. Be sure to talk to a financial advisor about the pros and cons and whether or not this might be the solution for your situation.
Thinking of selling your house while in forbearance? We answer that and more in this blog post “can I sell my house while in forbearance?”.
Consumer Financial Protection Bureau. Learn about forbearance.
Federal Housing Finance Agency. COVID-19 Information and Resources.
Barron’s. 2.67 Million Americans in Active Mortgage Forbearance Plans, and Two More Numbers to Know.