Mortgage Deferment vs. Forbearance: What’s the Difference?
The terms mortgage deferment and mortgage forbearance are sometimes used interchangeably. However, they are two different things.
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Here’s what each term means, as well as their key differences, so you’ll know which is the right option for you.
What Is Mortgage Deferment?
Mortgage deferment is defined as an agreement to move past overdue mortgage payments to the end of the loan term to be paid at a later date. Essentially, you’re delaying mortgage payments that you might not be able to make right now due to financial issues. Your monthly payment will stay the same.
Here are some pros and cons of mortgage deferment:
Pros
You can avoid foreclosure.
You’ll temporarily postpone payments.
Interest will not accrue during periods of deferment.
Cons
Missed payments will be reported in your credit history.
Your loan term may increase.
You may be required to provide proof of financial hardship.
What Is Mortgage Forbearance?
Mortgage forbearance is defined as an agreement between the homeowner and lender to temporarily pause or reduce mortgage payments. Any missed payments are required to be repaid once the forbearance period ends. A period of economic hardship, such as a job layoff, might be an appropriate time to request a mortgage forbearance.
With a mortgage forbearance, your monthly payments can be paused, you can choose a new repayment plan and your monthly payments can be reduced. Periods of forbearance usually last three to six months and are meant to be temporary.
Here are some pros and cons of mortgage forbearance:
Pros
You can avoid foreclosure.
You’ll temporarily have paused or reduced monthly payments.
You can remain in your home during periods of forbearance.
Cons
Periods of mortgage forbearance may be reported in your credit history.
Your future monthly payments may increase.
Interest will continue to accrue during periods of forbearance.
Should You Choose a Mortgage Deferment or a Mortgage Forbearance?
Before you decide whether to go into a period of deferment or forbearance, it’s important to evaluate both your current and future financial situation.
If you foresee your current financial hardship as temporary, meaning that it should be resolved within approximately 90 days or less, choosing a mortgage forbearance is likely the better choice.
However, if you anticipate your current financial hardship will impact your ability to repay your missed payments on top of your regular mortgage payments, then choosing a mortgage deferment to delay those additional payments until the end of your loan is the right move.
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This article originally appeared on GOBankingRates.com: Mortgage Deferment vs. Forbearance: What’s the Difference?
