Be Careful When Deferring Mortgage Payments For Covid-19, READ THE TERMS!
This is going to be a bit of a public service announcement post. More people being placed under a stay home and shelter order means that more people will be struggling financially. It is a trying time for many since we are unaware when these stay at home orders will end. Or when people will be able to get back to work again. There are programs being put into place to help lesson the burden but they may not be enough for many people. One thing people are considering is deferring mortgage payments or other such debts while the pandemic is going on. That is an option you should look at for sure, if it is needed, but please read the terms carefully.
Remember that I am not a financial adviser and I am simply giving you my thoughts on this situation after reading through everything.
Read The Terms If Deferring Mortgage Payments
Most people think of deferring payments as simply putting a pause on payments. What that essentially means is tacking the 2-3 missed payments to the end of the loan. Or simply extending the loan for a few months and just incurring some extra interest charges. That is the way it is set up for some things, like my car loan, but that is not the case for a lot of mortgages.
Here is what the program from Ally Auto (my auto lender) says about deferring payments:
With a payment deferral at Ally, we’ll extend your contract by the number of months you choose to postpone payment. To minimize finance charges, you can still make a payment at any time during your deferral period, but we’re eliminating late fees if you don’t. When your deferral period ends, you’ll resume making your regularly scheduled payments. The biggest change will be your contract end date, which we’ll adjust to account for any additional time you may need right now to defer your next payment for peace of mind.
Straight forward and easy. They are simply pausing the loan for a few months and will pick it back up where it left off. The only thing that changes is the end date of your loan and the overall interest you would pay.
Now here is what reader Frank sent me when he was looking at his Chase mortgage options:
…If you are unable to make your mortgage payment, we are offering the following protections for up to 90 days. Please note this is not a deferment of payments until the end of the loan. Payments will be due at the end of the 90-day period. (Link)
Most mortgage lenders are doing what is called a forbearance instead of a traditional deferral program. So when your forbearance is complete, after say 90 days, you will need to work out a payment plan to get caught back up and get the loan current.
Forbearance Vs Deferral
I think my mortgage company explained forbearance well so I will share their explanation (Penny Mac):
Actually, the majority of banks are not saying they will defer payments to the end of the loan. Most mortgage loans serviced in the U.S. are part of programs sponsored or insured by the federal government. These include loans owned by Fannie Mae and Freddie Mac, and loans insured or guaranteed by the FHA, VA or USDA. Together, these loans make up more than two-thirds of all mortgage loans in the U.S. today. These government-related agencies do have programs that allow missed payments from forbearance plans to be moved “to the end” of the loan; however, they involve either a new note and second lien against the property in the amount of the missed payments, or an extension of the maturity date of the loan.
The programs available are unique to each of these agencies and require a review of individual circumstances to determine which program will best resolve the homeowner’s hardship. For example, many customers require more permanent relief through a loan modification to lower their payments, and others have the ability to make payments through a repayment plan.
Some banks own their own loans, which provides them the ability to solely determine how they address missed payments. However, they also service loans for the federal agencies described above and are limited to offering those agencies’ programs on those loans. We encourage you to work with us. You can feel confident we will offer you the best program available to meet your individual needs.
So it seems there is a lot more paperwork with mortgages to simply extend a loan versus what can be done with an auto loan etc.
What Does This Mean For Me?
If you are having trouble meeting all of your debt obligations I would personally focus on other options outside of your mortgage. To get true relief a standard deferral program would be the most beneficial, tacking the skipped payments on to the end of the loan. Because of this I would focus on auto loans or other personal loans first that have more wiggle room in what they can do.
I would approach the mortgage forbearance option as a last ditch option since that will require increased payments to get caught up. Many people are already living paycheck to paycheck and increasing monthly payments would be difficult when they get back on their feet. At least if you go with a deferral the payments should remain about the same. They will just go on for longer than they would have.
These are emotional and scary times and during emotional times people tend to make emotional decisions. I implore you to take your time with these decisions and read the terms before making a choice. Especially when you are dealing with deferring mortgage payments because the terms may not be what you thought they would be.