When it comes to pausing payments, there are two potential paths you can take: Deferment and Forbearance. Knowing the difference between the two can help prevent a shaky financial situation from becoming even worse.
At first glance, deferment and forbearance look the same. They’re both band-aids, allowing borrowers to temporarily stop payments during times of financial trouble. Sure, those payments will need to be repaid, but if you’re in a situation where you can’t pay the bills, both options can help you keep food on the table and avoid damaging your credit score with missed or late payments.
The main difference between forbearance and deferment lies in how your expected to pay back the skipped payments.
With deferments, your payments are tacked on to the end of your loan. For instance, if you have 25 years left on your mortgage and defer payment for three months, at the end of the deferment period you’ll see a balance of 25 years and three months. So your basically extending the life of your loan while keeping monthly payments manageable in the future.
They can be tricky, though. Depending on the terms of your loan, unpaid interest may be added to the total amount and accrue from there, meaning you’ll end up paying interest on interest.
You also run the risk of having a shortage in your escrow account to pay insurance and taxes, which can cause your monthly payment to increase in the future.
Every financial intuition handles deferment differently, so make sure you speak with a representative beforehand to understand the terms.
With a forbearance, the skipped payments are due at the end of the agreement. Meaning every skipped payment is expected to be paid at the end of the forbearance period. For example, if you skip payments in April, May and June – on July 1st all three of those payments will be due, plus July’s payment.
Homeowners who don’t fully understand the terms may feel blindsided when they receive a massive bill down the line.
If you’re considering pausing your payments, it’s important to understand what you’re agreeing to. Forbearance is not forgiveness. Ask your lender if you can become current on skipped payments over a longer period of time. And, always, always read the fine print.
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