Mortgage forbearance proved to be an essential lifeline for many homeowners during the COVID-19 pandemic. Under the CARES Act, many mortgagors were eligible for up to 18 months of forbearance. But as life starts to return to pre-pandemic "normal," borrowers are struggling to catch up on their mortgage payments.
More than a third (35%) of mortgage borrowers who entered forbearance during the pandemic are still in forbearance, according to a new study by the New York Federal Reserve. Low-income borrowers and first-time homebuyers are most likely to be stuck in forbearance for longer periods of time, struggling to resume their monthly payments.
Learn about the implications of long-term forbearance below, with tips on how you can get out of mortgage forbearance by refinancing, downsizing or saving up. If you're ready to exit forbearance, Credible's online marketplace can help you shop for the best mortgage rates for you.
What happens during mortgage forbearance?
Mortgage forbearance allows borrowers to suspend their monthly payments without becoming delinquent but it’s not forgiveness.
You still owe the payments to your mortgage servicer and interest accrues on the balance during this period. This adds to the long-term cost of your mortgage, which is why forbearance is more of a safety net than a financial strategy.
In addition to making your mortgage loan more expensive over time, some home loans that are not backed by Fannie Mae or Freddie Mac may require a lump-sum balloon payment at the end of the forbearance period.
What you can do to get out of COVID-19 forbearance
Consumers have utilized mortgage forbearance as a way to get back on their feet financially, but resuming mortgage payments in full is easier said than done. Here are a few ways you can exit coronavirus mortgage forbearance and get back to paying down your home loan.
- Refinance your mortgage
- Sell your home and downsize
- Find other ways to cut costs and save money
1. Refinance your mortgage
If you’re still in COVID-19 mortgage forbearance but you’re continuing to make your monthly mortgage payments, you’re in luck. The Federal Housing Finance Agency (FHFA) mandated that mortgagors in forbearance who have made at least three consecutive monthly payments are eligible to refinance or buy a new home.
This regulation ensures that mortgage borrowers, even those who are in forbearance, have access to the market’s historically low mortgage refinancing rates.
See what kind of rates you may be eligible for on Credible’s online marketplace. You can compare refinance rates across multiple mortgage lenders so you know you’re getting a good rate.
2. Sell your home and downsize
Many mortgage borrowers have gotten out of mortgage forbearance by selling their homes, taking advantage of the equity they’ve built thanks to the current market’s record-high home values. The average existing home sales price rose 17.2% between March 2020 and March 2021, from $280,700 to $329,100, according to the National Association of Realtors.
With such a rapid gain in value, it’s possible that you’ll be able to sell your home and prepay your mortgage, including any forbearance due.
However, keep in mind that high home values will make it difficult to find another home in the same price range, so it may be smart to downsize or move to an area with a less competitive housing market, if possible.
During the homebuying process, it’s important to find a mortgage that you can afford to keep up with so you don’t just end up back in forbearance in a smaller home. You should also use a tool like Credible’s online marketplace to compare mortgage rates and get the best deal on a home loan.
3. Find other ways to cut costs and save money
Many industries have bounced back as the pandemic begins to fade into memory, but workers in some sectors may still be affected by lower incomes or shorter work hours.
It may not be possible for all borrowers to increase their income to pre-pandemic levels, so a solution could be to cut costs in your monthly budget. Here are a few ways to do just that:
- Pay down high-interest credit card debt. The Fed’s report found that mortgagors in forbearance used their extra cash to pay down credit card debt by $2,100 on average, which can cut down monthly costs when mortgage payments resume.
- Consolidate other debts. A balance-transfer credit card or debt consolidation loan can save you money in interest and lower your monthly debt payments. You could also contact a certified credit counselor to enroll in a debt management plan.
- Refinance other debts while rates are low. For example, you may consider refinancing your private student loans. Borrowers who refinanced their student loans to a shorter term on Credible saved $17,344 on average. To see if refinancing is right for you, visit Credible.
When refinancing, shop around to compare rates
While you might consider refinancing with your current mortgage lender, they may not be able to offer you the lowest rate possible. You should shop around with multiple lenders to try to find the best refinance rate for your situation. You can also use that research to see if your current lender will match or beat the rate. The same goes for all other types of loans, like personal loans and student loans.
Credible's online loan marketplace lets you prequalify and see potential rates all in one form, without affecting your credit score. You can also get in touch with experienced loan officers who can help you devise a course of action.
Have a finance-related question, but don't know who to ask? Email The Credible Money Expert at email@example.com and your question might be answered by Credible in our Money Expert column.