For many people, the forbearance offered by lenders during the height of the COVID-19 pandemic was a much-needed, although temporary, reprieve from financial hardship. But as many face their forbearance end dates, knowing the options available will help you decide how to pay off balances and resume making regular payments.
While according to a Northwestern Mutual 2020 study roughly 26% of U.S. adults took advantage of deferral plans, including mortgages, rent, credit card bills, utilities, student loans, and auto loans. Here we’ll focus on options for when your mortgage, student loan, or credit card debt forbearance ends:
There’s a variety of options to choose from when deciding how you want to pay off your mortgage forbearance balance. First, you can follow a repayment plan in which you add a portion of your forbearance balance to your regular monthly payment. You can also choose the reinstatement method, which means you pay off your forbearance balance in a lump sum while resuming your regular monthly payments. (It’s important to note that under the CARES Act lenders cannot require you to pay a lump sum if this is not the option you choose.) Choosing a deferral or partial claim means you defer your forbearance balance until you have paid off your mortgage, or your loan payments are put into a junior lien, which is repayable when the owner refinances, sells, or terminates their mortgage.
If you know that you will probably still struggle to pay your mortgage, you can apply for a loan modification, which is a service that lowers the interest rate or balance of a home loan or extends the terms so that monthly payments are more affordable. Meanwhile, it may be possible to extend your forbearance. Homeowners with conventional loans can request an additional three-month extension for a total of 15 months, as long as you have been in COVID-19 forbearance prior to Feb. 28 of this year, while homeowners with government-backed loans as of June 30, 2020, have the option to request two additional three-month extensions for a total of 18 months forbearance.
When forbearance ends some financial experts suggest refinancing your student loans, but only do so if you want to take advantage of fixed interest rates to lower your APR and monthly payment, and only if you’re financially stable. When your forbearance ends, as long as you’re able to make payments, your balance will be added to your loan balance, extending the amount owed. Depending on your lender, you may also be able to pay it as a lump sum at the end of your loan.
Credit Card Debt
Unfortunately during a credit card payment deferral or forbearance, you still collect interest on your balance, and if you used your card at all during your payment pause, your balance will be higher as well. If you’re able to, making higher payments to cover accrued interest once your deferral ends could go a long way toward helping you pay off the balance. However, if you’re unable to make payments once forbearance ends, your credit score may be negatively affected, and it might be time to look into a debt management plan to help pay down your debt.
While mortgage loans are considered secured loans, credit card debt and student loans are considered unsecured, which is what debt management plans were designed to help with. Credit counselors will work with you and your credit card companies to consolidate your debt, lower your interest rate, and create a monthly payment that is affordable and customized to your specific situation.
Knowing what your repayment options are can help you prepare for when your forbearance ends, helping maintain credit health as you plan your next step to greater financial well-being.