Due to the Covid-19 pandemic, and the unprecedented economic damage it inflicted, many lenders created deferment and forbearance relief programs to assist borrowers in their time of need. While this was welcomed relief for the unemployed and those suffering from severe reductions in income, consumers participating in these programs should understand what is expected of them once these programs end. Also, those looking to take advantage of these programs should assess the pros and cons, as longer-term negatives could outweigh short-term positives. To eliminate the confusion around these programs, below are some keys things to understand:
Deferment vs. Forbearance (What’s the Difference?):
While both terms are generally used to describe pauses and/or reductions in loan payments, there are meaningful differences.
Deferment: When a borrower is receiving a deferral, it typically means they are not required to make loan payments, and interest on the loan is NOT accruing during the deferral period. Also, deferrals typically allow repayments to be made over time at the end of the deferral period.
Forbearance: In contrast to deferrals, interest for borrowers receiving forbearance continues to accrue during the forbearance period. The principal and interest are often required to be repaid in full at the end of the forbearance period.
Recommendation: Contact your lender to understand the terms of their program fully. Policies can vary from lender to lender, so be sure to understand the terms of their specific program. Understanding your responsibilities on the backend is critical!
Only Use if Necessary
It may appear there is little downside to taking advantage of these programs, so let me dispel this myth. I recently learned of someone who owned a second home, which was in forbearance for over three months. At the time, they elected forbearance relief; other options existed for them to bridge their income gap, which now no longer existed. This person was attempting to refinance the home and reduce their mortgage rate by well over 1% but was shocked when their lender would not allow the refinance until all forbearance principal and interest were paid in full. In addition, because of this person’s inability to pay the forbearance in full, they were potentially losing out on thousands of dollars in savings over the life of their mortgage.
Recommendation: While deferments and forbearances are useful tools in desperate times, ensure the short-term positives outweigh potential near/long term negatives.
Follow The Welch Group every Tuesday morning on WBRC Fox 6 for the money Tuesday segment.
Fox 6 Talking Points:
- Deferral vs. Forbearance (There are Differences!)
- Only Use if Necessary
Marshall Clay CFP, JD, is a Partner and Senior Advisor at The Welch Group, LLC, which specializes in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™. In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.
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