by Maurie Backman | Updated July 19, 2021 - First published on Nov. 11, 2020
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Here's some good news in the mortgage world: Fewer home loans are being paused.
Many homeowners have struggled to keep up with their mortgage payments during the coronavirus pandemic. Thankfully, mortgage forbearance has helped a lot of borrowers.
Forbearance doesn't cancel mortgage payments; it simply pauses them for a period of time. During the pandemic, borrowers can request an initial 180-day forbearance period followed by a 180-day extension. That gives homeowners a total of 360 days where they don't have to make a mortgage payment. Once forbearance ends, those skipped payments must be caught up on, the details of which vary from lender to lender.
This week, there was some encouraging news on the forbearance front. The national forbearance rate fell to 5.67%, according to the Mortgage Bankers Association (MBA). This comes in conjunction with a lower unemployment rate in October and could signify the U.S. economy is finally on its way to recovery.
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Simply put, a lower forbearance rate is an indication that fewer borrowers are pausing their home loans. It also suggests a lot of borrowers who put their loans into forbearance earlier in the pandemic aren't extending their forbearance once the initial 180 days comes to an end.
But there's a caveat here, and it's that some borrowers may not know they have the option to extend their forbearance. In fact, mortgage loan servicers are required to obtain borrowers' consent before extending forbearance. It won't happen automatically.
What's slightly worrying is that the MBA says that loan servicers are having trouble reaching borrowers whose mortgages have been paused for six months. A lower forbearance rate could be a sign of economic improvement. But it could also mean that some borrowers simply aren't aware of their options.
If you're having trouble keeping up with your mortgage payments and are at risk of falling delinquent, forbearance is a better option. That way, those missed payments won't get added to your credit report. Missed payments can lower your credit score substantially, making it more difficult to borrow when the need arises.
One misconception about mortgage forbearance is that you're not allowed to make payments while your home loan is paused. That's just not true. You're allowed to pay your mortgage during forbearance; you're just not required to. If you're able to pay your mortgage every other month, or make a partial payment each month, it will be a lot easier to catch up on your missed payments once your forbearance period ends.
Of course, another option you might consider is refinancing your mortgage. You should only do this if your credit score is good and you think lowering your monthly payments by a few hundred dollars or so will help you keep up with your loan. If you're currently on the hook for a $1,000 monthly mortgage payment, refinancing might knock it down to $700 or even less, depending on the rate you get. But if you're only able to swing a $200 monthly payment right now, refinancing won't be enough. In that case, you could put your loan into forbearance and pay that $200, or whatever amount you can, until your financial circumstances improve.
If you are going to put your mortgage into forbearance, make sure you understand the terms of that arrangement. The fact that a lower forbearance rate may be attributable to borrowers not knowing they can extend is a bit disturbing in its own right. So get all of the details before you decide to move forward.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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