Skipping a payment
There are going to be times throughout the life of your mortgage where you’ll wish you had a little extra money in your monthly budget. Whether your car died, you didn’t receive the annual bonus you were relying on or you’re thinking of taking time off work, unexpected costs can add up fast.
That’s why many of the mortgage products on the market today have the option to skip a payment written into their terms and conditions. Is skipping a payment a good idea? Here’s a look at what it could cost you.
What happens if you skip a payment
Many lenders offer mortgage products that allow homeowners to skip between 1-4 monthly mortgage payments each year, without question. If you decide to skip a payment, it simply means you won’t be making one of your regular mortgage payments (principal + interest). When you skip a payment, not only do you miss the opportunity to pay down your mortgage balance, the interest is still charged and added to your mortgage balance.
Let’s look at an example: On January 1st, 2013, you make your first payment on a $350,000 mortgage loan you took out to buy a home. With an interest rate of 3.28%, your monthly mortgage payment is $1,707. For the purpose of this example, let’s say your mortgage rate and payment stay the same for the entire 25-year amortization period.
On January 1st, 2014, you consider skipping a payment. Here is what your mortgage balance would look like under each scenario:
As you can see, if you skipped your January 2014 mortgage payment, you’d miss the chance to pay down $780 of principal + $927 of interest, and to lower the overall remaining balance of your mortgage. Instead, that interest ($927) would be added to the principal as it was on December 31st ($341,561), so your balance would actually go up (to $342,488) by not making that payment.
Note : You will still be responsible for paying your home insurance premiums and property tax installments, if applicable.
How skipping a payment affects the total mortgage amount paid
The problem with skipping even one mortgage payment is that it results in interest capitalization; this is when your interest is added to the balance of your loan (as shown above), which is continually charged more and more interest, until the day you make your final payment.
Continuing on with our example above, let’s determine how much additional interest you would pay over the life of the mortgage if you skipped a payment. For the purposes of this example, we’ve assumed the same mortgage rate and payment over the entire 25-year amortization period.
To determine the cost of the skipped payment, we must determine the difference in total paid throughout the 25-year mortgage amortization period
$514,151 (total mortgage)
- $512,115 (total mortgage w/ skipped payment)
= Additional costs from skipping: $2,036
By skipping one monthly payment in 25 years, you would pay an additional $2,036.
Can I repay my skipped payment(s)?
If you skip a payment, you can repay it at any time during your current mortgage term without penalty. However, to fully reverse the effects you must pay back the monthly payment as well as all additional interest accrued on the interest portion of the missed payment.
Skipped payment qualification requirements
So long as it’s a privilege written into your mortgage’s terms and conditions, in order to skip a payment, most lenders simply require that:
- Your mortgage not be in arrears (meaning you’ve missed 1 or more of your mortgage payments), and
- The current mortgage balance + the payment amount you wish to skip cannot exceed the original amount of your mortgage.
It’s rare for skipped payment privileges to be offered to homeowners with high-ratio mortgages. It should also be noted that skipped payments are not commonly offered with 10-year mortgage terms.
Is skipping a payment a good idea?
If you lose your job or are facing any financial crisis, skipping a mortgage payment can offer you and your budget some temporary relief. However, you should be conscious of how much more you could potentially pay in interest charges over the life of your mortgage, especially if you choose not to repay your skipped amount. If you’ve spent the time before this financial crisis making extra payments with the goal of paying it off sooner, skipping a payment could erase most of your efforts.
Tip : Rather than skipping a payment, you could consider refinancing your mortgage instead, to access equity, or to get a lower mortgage rate and a smaller mortgage payment. Click here to talk to a broker about your options.