Have you ever heard of the term ‘forbearance?’ It refers to a lending practice that is designed to help you deal with your mortgages and other financial obligations during stressful, difficult times. Most recently, this term hit the newswire as part of the CARES Act, the bill that is designed to protect citizens and stimulate the economy during the COVID-19 concerns. Because many states shut down everything except for essential businesses, a lot of people have had concerns about whether or not they will be able to cover their home payments.
Forbearance is, essentially, an extension on your loan payments. It allows you to postpone your scheduled payments until a later date, so you can focus on taking care of other costs and needs in your life right now. It’s important to note that this is not forgiveness on your loan — it is only a suspension of your current payments. That means that you will have to pay back the loan in full at some point, whether immediately after the period of forbearance, stretched out over the course of your loan, or as a bulk sum at the end of your loan. This is intended to be temporary relief for homeowners, not loan forgiveness.
Forbearance and the CARES Act
You might be asking — how does the CARES Act allow homeowners to suspend payments on their mortgage? If your loan is backed by the federal government — and you have been affected by the COVID-19 pandemic — then there is a chance that you will be able to get forbearance on your mortgage for a period up to 180 days. If you still need more time after that period, you can apply for an extension up to 180 more days. To request a forbearance on a government-backed loan, you must reach out to your loan servicer directly.
But what if your loan is not backed by the federal government? You might still have options for deferred payments or forbearance, but these options are not guaranteed under the CARES Act.
Should I apply for forbearance on my mortgage?
In general, we would not suggest that you apply for forbearance unless you are facing job loss or serious financial hardship. Because the CARES Act does not provide for loan forgiveness, you will still be required to pay the entirety of your home loan — and taking advantage of forbearance will mean that your payments are more expensive down the road.
Instead, consider asking your loan servicer what options are available due to the extraordinary circumstances of COVID-19. Many private lenders are implementing some measures to support their debtors during these uncertain times, so make sure you do your research and find out what options are available through your loan servicer.
Will I build interest during forbearance?
Yes and no. Interest is a bit complicated when it comes to these suspended payments. On one hand, loans covered by the CARES Act’s regulations will not accumulate extra fees or interest. On the other hand, your mortgage will incur the natural interest rate. If you decide to spread your suspended payments across the rest of your loan, you might see your monthly interest going up in accordance.
As with many aspects of forbearance, the details will depend on your lender and the exact terms of your loan. Please reach out to your loan servicer and ask about the payment and interest details that would take place if you were to pursue forbearance.
What is the difference between refinancing and forbearance?
We’ve talked about refinancing options a few times before — most notably when discussing bridge loans and HELOCs. Some people have expressed confusion about whether or not forbearance is a type of refinancing, so we wanted to clarify.
No, forbearance is not the same as refinancing your home. You are not agreeing to a new payment plan on your home; you are simply pushing back the payments that you owe to your lender. If you choose to suspend your payments as allowed by the CARES Act, you are not fundamentally altering your lending contract. Instead, you are just altering the payment period slightly.
With that said, refinancing could be an attractive alternative to forbearance during these uncertain times. If you are able to access enough equity in your home, you might be able to create a buffer for yourself and find cash to pay off other debts and ensure the safety of your credit. Similarly, refinancing your mortgage to a longer period can sharply reduce your monthly payments and ease the burden caused by COVID-19.
Regardless of whether you choose to pursue forbearance or not, it’s vital that you have a solid understanding of your financial and real estate situation during these uncertain times — and the best way to do that is to speak with real estate professionals! At the Keri Shull Team, we work closely with local lenders and financial experts to ensure that all of our clients have the most advantageous mortgages and payment plans possible.
If you are interested in learning more about your real estate situation, then our home value experts are standing by to help; so contact the Keri Shull Team today! Just click here to schedule a free, no-hassle consultation today!
Your real estate needs are too important to leave to anyone but the best. For people living in Arlington VA, Alexandria VA, or anywhere else in the DC area, there’s no one better suited to help you than the Keri Shull Team — we guarantee it!