What Is a Skip-Payment Mortgage?
With a skip-payment mortgage, a borrower may forgo one or more payments on their mortgage without incurring any penalties. Instead, the interest during the missing periods will be added to the principle, and once the monthly payments start, they will be recalculated.
The majority of skip-payment mortgages are found outside of the US, particularly in Canada and a few Asian nations.
- With a skip-payment mortgage, borrowers are given a grace period during which they may avoid paying any fees or penalties.
- Future mortgage payments are amortized to include the interest and principal missed, which slightly raises the monthly payments coming ahead.
- Skip-payment mortgages, albeit unusual in the United States, are used to benefit homeowners in places like Canada and the Philippines.
- U.S. borrowers need to be cautious of deceptive marketing strategies that falsely claim the existence of skip-payment grace periods.
Understanding Skip-Payment Mortgages
A skip-payment mortgage scheme is intended to help borrowers who encounter a brief adversity, such sickness or accident. Although every Canadian bank has its own program, in general, the programs permit the equivalent of one missed payment each year.
To be eligible for a skip-payment mortgage, borrowers must have good credit and make all of their mortgage payments on time. The interest and principal that would have been due in that month will still be due, so borrowers should be aware of this. In actuality, choosing to miss a payment raises the total cost of interest throughout the loan’s life. Since there was no monthly payment, the interest is added to subsequent installments while the principal is not affected.
During the skip period, the borrower is also in charge of paying the property tax and insurance. The benefit of the skip-payment offer is that if a payment is missed, there will be no negative effects on the borrower’s credit report.
Even better, several Canadian banks have prolonged skip-payment plans that let borrowers postpone up to four consecutive mortgage payments. Banks warn customers that accepting such an offer would considerably increase a loan’s interest charges.
Misleading Skip-Payment Offers in the U.S.
Lenders often send marketing materials to American customers offering the possibility to forgo one or two months of mortgage payments. These offers should be viewed by borrowers with utmost suspicion since they often serve as marketing for refinancing schemes. Borrowers often skip a month or two of payments as part of the refinancing settlement procedure.
This lapse in payments may give the impression that refinancing releases the borrower from making one or more monthly installments. Those payments will still be the borrower’s responsibility; often, closing expenses include these installments.
On loans for cars, boats, or credit cards, certain U.S. financial organizations do offer skip-payment plans, but there are restrictions much as with the Canadian schemes. By deciding to forgo a payment, borrowers will likely increase the loan’s interest charges while still owing the main sum.
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