Can a forbearance help me?
Is a Forbearance a Good Solution?
While a loan forbearance may sound good, in truth, they are just too good to be true, and as such, a loan forbearance rarely turns out well for the home owners.
A Loan Forbearance is a special temporary agreement between the mortgage holder and homeowner that delays foreclosure proceedings due to homeowners’ temporary financial problems. The bank may agree to delay foreclosure if he or she believes that the homeowner will be able to catch up on the payments due within the next 12 months.
The main benefit to the homeowner is receiving time to catch up on their missed mortgage payments without having to worry about foreclosure. Another benefit is that the homeowner has the opportunity to customize a repayment plan that can be mutually beneficial to both parties. For example, the homeowner may negotiate for drastically reduced payments for the next 8 months while agreeing to pay a higher interest rate for the remainder of the note. The homeowner gets short term relief and the bank generates more revenue from the note in the long-term without having to waste time and money on foreclosure.
One thing many lenders do, before agreeing to mortgage forbearance, is increase the interest rate. An interest rate increase of 1%, (from 6.5 to 7.5%) for 20 years on a $150,000 note can cost the homeowner an increase of $100 per month, or $1200 per year, or $24,000 for the remainder of the loan. Also, the homeowner could suffer negative effects to their credit score during the forbearance process. Finally, a Loan Forbearance will not remove late fees that accrue on the principal amount, thus adding more to a loan. In other words, a 3 months forbearance for $2700 may cost the homeowner close to $30,000 to repay over the next 20 years!
A loan forbearance may be good only if you know that your problem is short term. In the long term, you take a ride on the ‘loan forbearance merry-go-round that Shenoah Grove details in the video.