Mortgage Forbearance Rate Drops to Lowest Level Since Mid-April

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Fewer homeowners are pausing their mortgage payments. Is this a sign of economic recovery?

The coronavirus pandemic has caused income loss and financial insecurity for millions of Americans. Thankfully, there's some relief available to homeowners -- particularly those who risk falling behind on their mortgage payments.

During the pandemic, borrowers can pause home payments for up to 360 days by requesting mortgage forbearance. Forbearance doesn't forgive those payments; borrowers will be required to catch up on them eventually. But it does give homeowners some flexibility during these very difficult times.

Many homeowners have taken advantage of forbearance in the past few months. But last week, the national forbearance rate fell 0.4% to 5.92%, according to the Mortgage Bankers Association. That means about 3 million homeowners have opted for forbearance -- the lowest level since mid-April. And that could be a sign that the economy is slowly but surely starting to improve.

Fewer loans in forbearance could indicate widespread economic recovery

A smaller percentage of mortgages in forbearance could indicate that borrowers are better able to make their home loan payments. And that could speak to the broader economy.

Since April, the unemployment rate has slowly but steadily trended downward. The more jobs that get added, the more homeowners can keep up with their mortgages. A lower forbearance rate could also indicate more general confidence in the economy.

The way forbearance works right now is that homeowners get an initial 180 days of paused mortgage payments, followed by a 180-day extension. It could be that homeowners who applied for forbearance six months ago are now in a better place financially, and therefore aren't requesting an extension.

Should you request mortgage forbearance?

If you're worried about falling behind on your mortgage payments, forbearance makes sense -- namely because it will protect your credit score in the near term. Being late on even a single mortgage payment could drive your score down. But if your home loan is put into forbearance, it won't have a negative impact on your score.

Of course, the downside of forbearance is that you'll be burdened with catching up on your missed mortgage payments. If you're thinking of pausing your home loan, make sure you understand how your mortgage lender expects you to repay those skipped payments. You don't want any surprises when the forbearance period ends. Each lender sets its own repayment rules, so it's crucial to know what you're in for.

It's encouraging to see mortgage forbearance rates drop. The economy still has a long way to go to get back to its pre-pandemic state, but these days, every bit of good news is news worth reading. Of course, it's unclear whether forbearance rates will continue to drop, especially as more borrowers come out of their initial 180-day period. But if they do decline week over week for the rest of the year, perhaps we can hope for a quicker economic recovery.

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