Depending on the context, hearing the phrase “deferred payment” may be a good thing or a bad thing. In this article, we’re talking strictly in the context of a borrower who is being told they will be able to defer one or more payments on their mortgage or another home loan. We’re going to explain what a deferred payment is, when it might happen, and how it works when it does. Some of this is covered in our Frequently Asked Questions, but some of it is not. Regardless, when you’re done reading this article, you’ll know everything you really need to know about deferring payments. It’s actually a fairly simple thing.
What It Is
Many people confuse a deferred payment with a skipped payment. Deferring a payment is not really the same thing as skipping one. Skipping a payment means that the payment comes and goes and you don’t make it. Deferring a payment is simply postponing a payment so that it does not come until later. When it does come, you pay it as you would any other payment. So a deferred payment is just a postponed payment. Deferred payments can be awesome, because it significantly eases your expenses for the month or two that you aren’t making payments, which allows you to make more headway on credit card debt, go on a vacation, or do something else with the cash that is not going towards your mortgage payment. So when your lender mentions deferred payments, there are some serious advantages in it for you.
When It Might Happen
Deferred payments usually come into play when you’re refinancing your home loan though they also commonly happen on a new purchase loan as well. It’s very common for your lender to take a month or two’s worth of payment in advance as part of closing costs, then give you a couple month break before you start making payments on your mortgage. When you’re refinancing your home, it still works basically the same way as on a new purchase, except that you have an existing loan holder that needs to be paid off. It’s very common during a refinance to not only have two months of payments deferred but also to receive an escrow refund from your old lender after you’ve closed on the loan. Escrow refunds can be great, though it’s important to remember that you were charged whatever you needed to be charged to fund your new escrow in your closing costs on your new loan, so if you come out on top at all, it will only be by however much extra was in the escrow from the old lender. However, that’s still cash in your pocket that you can choose what to do with, and deferred payments are the same. Deferred payments usually start at closing and end after no more than 2 months after.
How It Works
So, when you’re deferring a payment, it’s different from paying in advance. Often at closing, the lender will include the first month’s payment in closing costs, then defer the payment for the following month, so the first time you actually make a payment, it’s almost two months down the road. Why do lenders do this? Because the lender really wants to sell your loan on the market to a different loan holder, and it’s a lot easier for them on the paperwork, record-keeping, and liability side of life if they get it sold before they take any payments from you. Not to mention it’s a good way to incentivize people who are on the fence about the loan to take the plunge. While not directly related to deferred payments, you should keep track of when your next mortgage payment to your old lender is due before you’ve closed on your new loan. If you decide to hold off on making that last mortgage payment because you’ve already been processing your new loan with a certain amount, keep in mind that the old lender can still charge a late fee and even report the payment as late if it’s more than 30 days.
Deferred payments are good, they come at the very beginning of a new refinance or new purchase, and they can help you have some nice financial freedom before picking up the hammer again on your new loan.