In today’s hot real estate market, most owners have equity in their properties. However, if as a result of Covid-19 you’re enduring financial difficulties and have entered a forbearance agreement with your lender, there’s a good chance it is getting eaten away.
Remember, your repayment schedule is determined between you and your lender. If your mortgage is federally backed, then whatever payments you missed will be added as payments to the end of your loan period. In effect, you will just be having your loan go on longer than it was originally scheduled to.
However, it’s important to remember adding these payments to the loan increases the amount you owe, which reduces the amount of equity you have in your property.
How? The amount of interest the lender charges on what you owe continues – whether you make payments or not. So, if your loan is for $100,000 and your rate is 5%, as much as $400 of your regular monthly payment may be going toward interest. If your forbearance agreement lasts one year, you owe the bank $4000 in interest on top of the $100,000 balance.
If you have expenses like property taxes and insurance escrowed as part of your monthly payment, the lender continues to make those payments whether you are current on your mortgage or not. For example, if your annual insurance premium is $2000 and your annual property taxes are $6000, then at the end of the forbearance period, the $8000 they fronted you is added to the total amount you owe them.
Adding your outstanding balance of $100,000, the $4000 in interest, $6000 in property taxes and $2000 in insurance, the amount you owe the lender at the end of one year is now $112,000.
If you cannot make payments at the end forbearance, you will start the process of foreclosure. Not only will bites continue to be taken out of your equity, but your delinquency will start to impact your credit report and score as well.
If you end up having to sell your duplex through a short sale (can’t pay the total amount owed), the impact to your credit score may prohibit you from buying another property for two years. If the duplex goes back to the bank, you will have to wait seven years.
A better strategy may be to not wait until you reach the foreclosure stage or the complete depletion of your duplex’s equity. Instead, a better course may be to find other living arrangements, sell your property and preserve your credit.
That way, when life more closely resembles normal, you’ll be able to take advantage of all of the real estate opportunities that may be available to you.
If you’re experiencing financial distress and are unsure of all of your options, please give me a call. I helped countless clients through the last financial crisis. I’d be glad to help you find a path through that sets you up for a brighter tomorrow.