Think Carefully When Considering a Loan Forbearance

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Loan forbearance could be a viable option if you are one of the millions of Americans who have been directly, or indirectly, impacted by the COVID-19 pandemic. Forbearance could help you stretch your remaining funds if you suddenly lose your job or have your income reduced or while waiting for financial assistance from the federal government.

But before you speak with your servicer, you may want to find out first if applying for a forbearance would make sense or if there are other options available to consider.

The downside of loan forbearance

If you qualify, loan forbearance lets you temporarily postpone your payments for a certain period of time. For example, in a time of crisis, your servicer could allow you to postpone making payments for a few months. Once the forbearance period ends, you will need to repay all your missed payments. If your servicer lets you postpone your payments for four months, you will need to pay it all back in the fifth month. Making a bulk payment right after the forbearance term could be overwhelming, especially if you’re still uncertain when you’re going to recover your finances.

Another loan forbearance option that you could avail of is to reduce your payments for a certain period of time. Often called “repayment plans”, your servicer could allow you to pay half (50 percent) of your monthly mortgage for a few months. But once the timeframe of payment reduction ends, you could expect that your succeeding monthly payments would increase because your servicer will distribute the other half of your previously deducted payments until you fully repay it.

A loan forbearance agreement is a short-term relief and could be an option if you’ve started to miss making payments and your servicer allows you to have a repayment structure plan.

Ask if you could apply for a loan deferment instead

Loan deferment is another mortgage relief option you may consider if you qualify for it. Like loan forbearance, your servicer could allow you to postpone making payments for a few months. While forbearance and deferment both allow you to postpone payments, the key difference in the latter is that you could stretch the term of your loan to make up for the missed payments or pay a lump sum at the end of your loan term.

Major credit bureau Experian said, loan deferment will not affect your credit because once you’re approved, the servicer or lender will only report that your payments are currently deferred to the credit bureaus. If you stay current with your payments after the deferment it could even improve your credit scores as you prolong your good credit standing.   

Options you may consider other than loan forbearance

Aside from loan forbearance and loan deferment, you could also ask your servicer if you could modify your loan. Loan modification could be your viable option if you can prove that you’re experiencing extreme hardships but you’re willing to come up with a workable plan to repay your loan. If you’re allowed to modify your loan, your servicer could agree to permanently reduce your interest rate or monthly payments to make it more affordable and eventually help you protect your home. Most borrowers who lost their jobs, lost a spouse, or those who become disabled or seriously ill may consider applying for a loan modification.

You can consider yourself fortunate enough if you can still make your monthly payments. Experts would often advise that if you’re still comfortable with your monthly payments, you don’t need to call your servicer and add to the millions of other people who may immediately need to use the mortgage relief programs.

But if you’ve built enough home equity you could take the opportunity of the ongoing competitive interest rates and consider refinancing your mortgage so you could lower your monthly payments. Refinancing could be a viable option if you have built enough equity in your home, at least 20 percent in most cases, and you have the funds needed to cover closing costs. Some homeowners even consider refinancing to augment their finances using their home equity.

An experienced RPM Mortgage loan advisor can offer you a hand

In this tough situation that you think you’re going to miss making your payments, it’s critical that you call your servicer and discuss what mortgage relief program best suits your situation. However, if you want to take advantage of the ongoing competitive rates and borrow funds using your equity, an experienced RPM Mortgage loan advisor could help you with a refinance. Get in touch with us today to better understand your options.