If you’re feeling the economic impacts due to COVID-19, you’re not alone. That knowledge can help, but it doesn’t make the pressure any less stressful.
If you or your partner have lost income, you may be struggling to cover all your bills. The good news is, you have a couple of options to seek relief. One is the extension of the federal tax deadline from April 15 to July 15, and another is the CARES Act, which directs lenders to provide mortgage relief to borrowers. (The deadline for Minnesota income taxes remained in place at April 15.)
While the news may come as welcome relief during tough times, it’s important to understand what these options mean. They aren’t, after all, forgiving the payments; the payments are simply suspended temporarily.
It’s impossible to predict what economic recovery will look like, and whether Congress will extend further relief to consumers. For now, this guide can help you decide whether suspending these obligations is a sound financial decision.
So you filed an extension for July 15, 2020. Now what?
If you owe money, filing for the extension is a no-brainer: It gives you time to plan ahead and keep your other bills covered.
The new due date is July 15, 2020, which means if you wait to file until that time, you will get no penalties or interest fees assessed for waiting.
- Complete your tax documents in advance, if you haven’t done so already. Knowing what you owe is the first logical step.
- Do you have room in your budget to save up for the July 15 tax bill? If so, divide the full amount by the number of paychecks (including unemployment checks) you’ll receive between now and July 15. This is the amount you’ll need to set aside.
- Can’t set aside that much? Then save what you can. If you can make up for it in the coming weeks, great. (Sometimes, setting the intention is half the battle. It has a way of making solutions more readily apparent.)
If July 15 comes along, and you still don’t have enough for the entire tax bill, the IRS has options for you. Pay what you can, and contact the IRS. They may:
- Grant another brief extension
- Place you on a payment plan with monthly installment.
You can’t get off the hook entirely. However, taking action can eliminate penalties (though they can’t remove the interest) and give you time to plan. For the most up to date information from the IRS, visit their Coronavirus tax homepage here.
Deferring your mortgage: What you need to know
If you can still make your house payments — without sacrificing your family’s essential needs — most lenders would strongly recommend not seeking a forbearance on your mortgage. As along as you are able, keep making the payments.
However, when you reach a point where choosing between your mortgage payment and putting food on the table, that’s where forbearance can help you. The last thing you want is to simply allow your account to go 30, 60, 90 days past due without communicating with your lender. Not only will you rack up penalties, pushing your total due amount upward, you can end up in more financial hot water.
Don’t put off that phone call to your lender. Taking steps to protect your credit is the smart thing to do. Forbearance is one of those solutions that are available to you.
How a mortgage forbearance works is you and your lender come to an agreement to pause payments for a few months to buy you time to catch up financially. Before you move forward with one of these options, you’ll want to understand the fine print: What happens once the financial forbearance ends? Not all forbearance agreements are alike, and the following walks through examples of options your lender may offer you.
- Deferral: Once the deferral is up, those skipped payments are moved to the end of the loan term, essentially lengthening the loan while also bumping up the amount of interest you pay.
- What to consider about deferrals: This is the lending scenario people likely expect. While it doesn’t let you off the hook, it does let you keep your original payment. While you’ll end up paying more interest because of the longer loan term, it gives you breathing room to make up for lost time once your finances recover.
- Lump sum payment: When the deferral ends, the entire balance of skipped payments comes due.
- What to consider about lump sum payments: There are times when a temporary deferral makes good financial sense. For example, you’re expecting and waiting for money to come in from another source (say, from an inheritance, a sale or payment from work performed). At the same time, keeping up with other bills and payments won’t be a hardship. In other words, if you need time to collect money, or reduce expenses, this option can work.
- Repayment plan: The lender divides the amount of the missed payments, and spreads it out over several months.
- What to consider about repayment plans: Like the lump sum payment, this approach buys you the time you need to reduce expenses, increase cash, or a combination of both. Before you agree to these terms, take time to understand how this extra payment will impact your budget — and whether you can handle it.
- Loan modification: Your lender changes the terms of the loan, by lowering interest rates or increasing the length of time of the loan.
- What to consider about loan modification: By taking your situation or hardship into consideration, the lender finds a way to help you lower your monthly payment into something your budget can handle. Typically, a lender may explore this option once the forbearance is completed, and you can demonstrate a clear need for this form of relief.
Taking the first step toward a solution, and knowing which solution is right for you, can be difficult. Taking proactive steps now can minimize the damage to your credit score, and prevent penalties from piling up, so you will be in a better position to recover financially.
When a global pandemic hits home, you want to protect what you’ve worked for. At Minnwest Bank, we’re here to help you understand your options, so you can make the best choice for your financial future. For an overview of our relief options, visit our resources page, then make an appointment with a lender today. As always, you should consult your tax advisor or tax professional for additional guidance.
