Owning your own home is a dream shared by millions of Americans. Having a property to raise your family, fix up how you like, and enjoy security and stability are tremendous and common motivations for getting a mortgage and buying a home.
Homebuyers work hard to obtain the home of their dreams and – often – find it even more challenging to maintain it. This hard work is just one of many reasons having trouble paying the mortgage is so disheartening. Fortunately, there are several tools to help borrowers through tough times. One such tool is called a mortgage freeze.
What Is a Mortgage Freeze?
A mortgage freeze – otherwise known as a forbearance – is a temporary break from mortgage payments. For a set time, the lender pauses your payment requirements and agrees not to foreclose on your property. When the freeze is over, you begin making regular payments again in addition to any amount you did not pay during the freeze.
Key Benefits of a Mortgage Freeze
When deciding whether to obtain a mortgage freeze, consider the benefits it can provide. Some of these include:
- Prevents foreclosure while allowing you to stay in the home
- Gets you a break in payments so you have time to find a solution
- Does not impact your credit, or impacts it far less than late payments and foreclosure
Disadvantages to Consider Before Applying
You should also take the following downsides into account.
The Break Is Temporary
A mortgage freeze or forbearance typically lasts around three to six months, though some can be extended up to 12 months. In any case, the break is temporary, giving you a limited amount of time to fix the problems you are dealing with.
You Will Owe Back Payments and Interest
Though you get a break from making the payments, they do not stop adding up. When your forbearance period ends, you will owe every payment you skipped, as well as the interest that accumulated in the interim.
Your Lender May Require a Lump Sum or Higher Payments
At the end of your mortgage freeze, you might receive a hefty bill for all you owe. Unfortunately, most borrowers do not have large amounts of cash on hand after dealing with financial hardship.
Your lender may also divide your balance over a set repayment period instead. While this is easier to deal with than a lump sum, it makes your monthly payments even higher.
It Can Affect Your Credit if Reported
Not all lenders report forbearance. Many that do file it in such a way that it does not hurt your credit too much.
Technically, a forbearance means you have delinquent payments, and some lenders report it as such. Therefore, it does have the potential to impact your credit for a significant period.
5 Reasons to Use a Mortgage Freeze
Given that a mortgage freeze comes at a potentially high cost, it is crucial that you only request one when dealing with a serious situation. This situation should somehow make it impossible to pay all or part of your normal mortgage payments. The reasons for using a mortgage freeze can vary between individuals, but some of the most common include the following.
- Medical issues that require large payments or make it impossible for you to work
- Loss of income due to job loss, reduction of hours, or death of a joint borrower
- Damaged or destroyed home due to natural disasters, such as floods
- Divorce or legal separation
- National emergencies, such as the COVID-19 pandemic
Each of these is an entirely justifiable reason for requesting a forbearance. However, if you can still make your mortgage payments, you should continue to do so.
If you can’t make your payments, consider the following alternatives before choosing a mortgage freeze.
4 Mortgage Freeze Alternatives
Here are some options that many prefer over requesting a mortgage freeze.
1. Get a Loan Modification
A loan modification means changing the terms of your loan. Your lender might extend your payment terms or interest rate to help you obtain a lower monthly payment. If your lender agrees to your modification needs, this can be a simple solution when you have trouble making regular payments.
However, it can negatively impact your credit. You should only consider this if you are already missing payments or are underwater on your mortgage. To see how this loan option stacks up against refinancing, check out our comparison of a loan modification vs refinance. Thinking of switching your original loan to a new one? Learn more about how does refinancing hurt your credit.
2. Refinance Your Mortgage
If you are currently up-to-date on your mortgage, a loan modification may work against you. Refinancing is a better choice.
Refinancing your mortgage means getting a new loan to pay off your current loan. It lets you start fresh. You can shorten or lengthen your payment term, get a lower interest rate, and other options to better suit your needs.
Refinancing can lead to additional fees and even more interest in the long run, though. Weigh out your options carefully before making this move.
3. Sell Your Home
A less favorable option is to sell your home. For some people, this works out well, as they are no longer tethered to such a big responsibility. However, most homeowners wish to keep their homes — selling it may feel like killing a dream.
Still, selling is a better option than a foreclosure. It does not negatively impact your credit. As a result, you’ll be better prepared to purchase a new home when your financial situation improves.
A sale-leaseback provides a unique solution, allowing you to sell your house without having to move out.
Instead, you pay market-rate rent while you take the time to get on your feet. You can choose to move or repurchase the house later. Your remaining mortgage balance gets paid off. You just pay monthly rent to stay in your beloved home. You get to take the time you need to figure out your next move with cash on hand.
A mortgage freeze can sound like a great idea, especially when you feel buried beneath the weight of a mortgage you cannot afford. However, it can cause more harm than good.
It is imperative that you thoroughly understand each of your options before making any moves, seeking counsel when necessary. The choices you make today can impact your financial situation for months and even years to come. Take the time to ensure you make the right ones.