Have a Mortgage in Forbearance? You May Be Able to Refinance Soon Afterward

Have a Mortgage in Forbearance? You May Be Able to Refinance Soon Afterward

Today’s mortgage rates are really low — and you can take advantage of them, even if your mortgages payments are paused.

A lot of people are struggling financially during the coronavirus outbreak, and if you’re a homeowner, here’s some good news: During the pandemic, you can request that your mortgage lender put your home loan into forbearance for a 180-day period, followed by a second 180-day period if you need it. This means that, all told, you’re eligible for up to 360 days of forbearance, during which you’re not required to make mortgage payments.

To be clear, forbearance doesn’t forgive your missed payments; it simply allows you to skip them for a time without your lender pursuing a foreclosure. Once your forbearance period ends, you’ll have to catch up on the payments you missed, and the specifics will depend on your lender.

But here’s some more good news: If you put your home loan into forbearance, you won’t have to wait long to refinance your mortgage. As long as you make three straight months of payments when your forbearance ends, you’ll be eligible to refinance and take advantage of today’s great rates.

More flexibility for borrowers

Normally, mortgage forbearance is a black mark on your credit report, but during the coronavirus crisis, mortgage lenders are required to report borrowers in forbearance as current on their payments, even though they’re technically not. Because of that, you may be eligible to refinance your mortgage in as little as three months after your forbearance period, provided you stay current on your payments during those three months. Normally, it would take up to 12 months following forbearance to be eligible for a refinance or new home loan.

Should you refinance after forbearance?

Right now, mortgage rates are at record lows, so it’s a good time to refinance a home loan. But if your mortgage is in forbearance, it may be a while until you resume payments, and from then, you’ll need that three months of payments to be eligible to apply. So you can plan to refinance once your loan is out of forbearance, but whether it pays to do so will depend on rates at the time and your personal plans.

As a general rule, refinancing makes sense if you can shave around 1% or more off your existing mortgage interest rate, and if you plan to stay in your home long enough to recoup your closing costs. Imagine you’re charged $5,000 to refinance your mortgage, and that doing so shaves $200 off your monthly payments. In that case, it will take you 25 months to break even and then start saving money. If you’re planning to move sooner than that, refinancing wouldn’t make sense.

But if your credit score is solid and you don’t intend to move soon, refinancing after forbearance could be smart. And since forbearance won’t count against your credit score right now, you won’t have to worry about that number. In fact, refinancing could make your home a lot more affordable, so that if another financial crisis (personal or universal) rears its ugly head, you’ll have an easier time keeping up with your payments.