Definition and Example of a Skip-Payment Mortgage
A skip-payment mortgage lets borrowers miss a mortgage payment occasionally. The skipped payment is not a forgiven payment: The borrower’s principal balance is not credited as though the payment had been made, and, in fact, the accrued interest on the skipped payment is added to the borrower’s principal balance.
- Alternate names: Skip-a-payment mortgage option, payment holiday
Skip-payment mortgages are not common in the U.S. It’s more typical for mortgage holders to work out temporary, case-by-case hardship options with their lenders.
In the U.S., it’s more likely that mortgage companies will provide forbearance or payment deferral options to borrowers who are unable to make a mortgage payment—or unable to immediately pay past-due mortgage payments—rather than offer a skip-payment mortgage as a standard product.
Unlike a skip-payment mortgage, forbearance and payment deferral options generally require the borrower to demonstrate financial hardship.
It is important to understand that none of these options are free, and they generally increase the amount of interest a borrower will pay over the long run. For example, with a skip-payment mortgage, if a hypothetical borrower has 20 years left on a 30-year mortgage with a 3% fixed interest rate, and their monthly payment of principal and interest is $1,000, they will incur $767.07 in additional interest over the remaining years of their mortgage if they skip one payment. The amount of additional interest would, of course, be less if the borrower chooses to repay the skipped payment at some point.
How a Skip-Payment Mortgage Works
If a bank or credit union offers a skip-payment mortgage, it likely will have requirements for those who wish to take advantage of the option.
Although requirements vary among banks, examples of common ones include:
- Frequency of using the skip-payment option: A bank may only permit a borrower to skip a payment once in a certain number of months, and may limit the total number of times a borrower skips a payment during the entire amortization period.
- Status of mortgage: A bank may only permit a borrower to skip a payment if they are current on their payments.
- Mortgage balance: A bank may only allow a borrower to use this feature if their current mortgage balance, including the skipped payment, is less than or equal to their original mortgage amount or a particular loan-to-value (LTV) ratio.
- Previous extra payment: A bank may only permit a borrower to skip a payment if they have previously made an extra mortgage payment.
- Bank approval: While some banks may permit a borrower to simply skip a payment without notice, other banks may require preapproval before permitting a borrower to skip a payment.
- Credit history: A bank may only permit a borrower to skip a payment with no recent bounced checks or late payments.
- Status of tax payments: A bank may only let a borrower do this if they are current on their tax payments.
- Life event: A borrower may be allowed to skip more than the usual number of payments if needing to care for a new baby or a sick family member.
- Age of mortgage: This may only be permitted if the loan has been open for a minimum number of days.
Borrowers with a more frequent mortgage payment schedule are generally allowed to skip more payments than borrowers who make monthly mortgage payments. For example, if a bank permits borrowers who make monthly mortgage payments to skip one payment per year, it may permit borrowers who make weekly mortgage payments to skip four payments a year.
Even if a bank permits a borrower to skip a mortgage payment periodically, this does not relieve the borrower from remaining current on other obligations pertaining to their property, such as property tax payments and homeowners insurance premiums.
Alternatives to a Skip-Payment Mortgage
If your bank doesn’t offer a specific skip-payment mortgage option, it may still permit you to miss one or more payments under a forbearance or payment deferral agreement.
Unlike a skip-payment mortgage option, these options generally require the borrower to show some kind of financial hardship. Many borrowers exercised these options in 2020.
A mortgage forbearance is an agreement between you and your mortgage company to temporarily suspend or reduce your mortgage payments.
Unlike with a skip-payment mortgage, you will likely need to show your mortgage company that you are experiencing some kind of temporary hardship such as a job loss, a medical issue, or some other life difficulty.
Also, while the terms of a particular lender’s skip-payment mortgage will generally be the same for all borrowers, forbearance agreements are determined on a case-by-case basis, with variables such as:
- How long your mortgage will be in forbearance
- Whether your mortgage payments will be suspended altogether or merely reduced
- If your mortgage payments are going to be reduced under the forbearance agreement
Similar to a skip-payment mortgage, your missed payments are not simply forgiven and erased under a forbearance agreement; they will need to be repaid at some point through options such as:
- Additional payments on a monthly basis after the forbearance agreement ends
- A payment deferral
- Modifying the loan in some other way
A payment deferral allows you to temporarily skip past-due mortgage payments by moving them to the end of your mortgage term, thereby increasing the amount due on your last mortgage payment date.
If you sell or refinance your home before the end of your current mortgage, these deferred payments will become due to your lender along with the rest of the principal balance and accrued interest on your mortgage.
While a deferral arrangement will not allow you to skip your current mortgage payments—it is typically a requirement to be approved for a deferral arrangement for which you can make your regular monthly payments—it can help you deal with past-due mortgage payments. Your lender may require evidence that you have recently experienced and resolved a short-term hardship to approve a payment deferral arrangement.
While skipping a mortgage payment or payments, whether through a skip-payment mortgage option, a forbearance agreement, or a payment deferral agreement, can help with your monthly cash flow, it is not always a necessity or wise.
Only you can decide whether skipping a mortgage payment is right for you, so make sure you understand the terms of your particular arrangement with your lender, especially what it will cost you over the life of your mortgage, before choosing to do this.
Skip-Payment Mortgage Fees
While some banks do not charge borrowers a fee to skip a payment, inquire with the bank about this before skipping a payment. Some lenders offering skip-payment mortgages charge a flat fee based on the mortgage balance for borrowers to take this action. Even though a bank or credit union may not charge a fee for a borrower to skip a payment, doing so will still cost a borrower more in interest over the life of their loan.
How To Get a Skip-Payment Mortgage
Not all mortgage lenders offer skip-payment mortgages. This is especially true in the U.S., where your best shot at getting a skip-payment mortgage is likely to be a local or regional credit union. Even those banks that do offer skip-payment mortgages do not necessarily allow payment skipping on all their mortgage products.
If you are interested in getting a skip-payment mortgage, you should ask your bank if it offers them. If it doesn’t offer skip-payment mortgages, your bank may still have other options available if you are unable to make an upcoming mortgage payment.
- A skip-payment mortgage is a mortgage that allows a borrower to periodically skip a mortgage payment if they choose. They are more common in Canada than in the U.S.
- Although skip-payment mortgages are rare in the U.S., it doesn’t hurt to ask your lender about your options, especially if it’s a local or regional credit union.
- The interest on the skipped mortgage payment is added to the borrower’s principal balance.
- Even if you don’t have access to a skip-payment mortgage program, your lender likely has other options available if you are unable to make a mortgage payment due to financial or other hardship.