HOUSTON – Millions of Americans are out of work and not able to pay their mortgage right now. To help, most lenders are offering to let customers skip one or a few payments. It’s called forbearance. Before you take them up on this offer and skip a payment or a few, hold up. You should know that skipping just one payment could do more damage in the long run.
The problem with forbearance
The lender is not forgiving your loan. You will still have to make the payments they are letting you skip by either paying them all back at the end of three months, tacking them on to the end of your loan or by spreading them all out over the remaining length of your loan, making your monthly payments a little higher.
Cathy Baker of Baker Mortgage said banks are really quick to tell customers that they won’t report the missed payments as “skipped payments” on their credit reports; but she says that’s not all you need to know.
“It's not what they're telling you that you have to worry about,” Baker said. “It's what they're not telling you.”
Baker said your credit report will have the word “forbearance” on it, a kind of scarlet letter.
“The minute someone opts not to make a payment or two or three, immediately- their credit report is branded with the word 'forbearance,’" she explained. That’s close to having a bankruptcy or foreclosure on your credit report.”
Baker said that word means you won’t be able to refinance your mortgage for at least 12 months. Interest rates are so low right now, refinancing may be a better option financially than forbearance. The average interest rate on a 30-year fixed mortgage at the time of this writing is about 3.25%.
Refinancing versus Forbearance
“When you refinance your house, you get to skip a payment anyway,” said Baker. “And if the closing is timed right, you can actually skip two payments.”
In many cases, your closing costs can be rolled into the refinancing, so you may not need to bring any money to the table.
Forbearance may be the only option for people who are out of work with little or no equity in their homes, but if you don’t fall into that category, don’t take it.
“The problem is too many people that actually didn’t need this relief have taken advantage of it thinking it’s a good thing, when in fact, it can be a very bad thing,” warned Baker.