Should you skip mortgage payments if you don’t have to?

Should people skip mortgage payments even if they can pay them? 

One thought that I’ve been toying with during COVID-2020 is whether or not I should take advantage of the banks’ “generosity” and skip mortgage payments

Truth be told I can pay my mortgages no problem, and I’m purely thinking about taking advantage of the opportunity in front of me.

skip-mortgage-payment-interest
  • This post is written for other super savvy financial people (100% of my readers I hope). 
  • If you aren’t in a nice financial position my heart goes out to you.
  • If you will defer your payment and buy something fun, my heart does not go out to you. Pay your bills and go get motivated to save.

Today you’ll learn

Why would I skip mortgage payments?!?

There are 3 special things going on right now:

  1. Everyone can justify financial hardship in some way. 
    Yes, I have enough money to be retired, but I also have very little “employment income” and my rental houses could believably not be paying rent (they all are).
    So, I’m sure even I could talk my way out of a few payments. (I know this is “not why banks are doing this”, but this is just a thought experiment.) 
  2. The more serious downsides are gone
    Often skipped payments come with horrible fees and horrendous credit issues. These are largely waived right now which removes the horrible downsides.
    My bank, for example, issues no special fees and no bad credit for skipped payments.
  3. Maybe investing the money would be better than average?
    Or maybe not… Let’s find out. 

Why is it bad to defer mortgage payments?

Really quickly, for 99% of the people, they should pay their mortgage. By not paying one payment (forget about multiple payments) you will be incurring a huge amount of extra interest on your loan.

pay off mortgage early - debt

In general, the skipped payment+interest gets added onto your owed principal and then you pay that plus the extra interest. The most reasonable case is that they just boost your monthly payments slightly to cover for it. 

Your lender’s terms may include requiring a lump sum within 1 year or so instead of increased monthly payments. Don’t defer if that’s the case…unless you are about to go bankrupt. Then good luck and tighten your belt!

If a $2000 payment gets skipped on a mortgage with 15 remaining years, you’ll end up paying an extra $14.51/month and an extra $657 in interest over the loan’s term (4% interest).

So we get it, skipping a payment isn’t supposed to be a good idea. But then why am I thinking about it?

Why might one defer mortgage payments?

I’m not a “pay your mortgage” kind of guy and generally recommend against early payments. I’ve talked before about the fact that I’d rather just invest the money.

So… a skipped payment is kinda like an early payment but in reverse? Right? Maybe, undoing a previous early payment. 

Let’s recall:

  • Interest rates are at historic lows (~4%)
  • Historic average stock market returns are ~9.5%. 
  • That 9.5% is not inflation-adjusted S&P 500 historical return… because mortgage payments are also not inflation-adjusted.
invest-or-skip-mortgage-faster-payment

On top of that, we’re likely heading into a recession, so those historical averages are not useful.

Markets have already dropped a lot, so if anything, the 3-year return on today’s stock investments will be well above 9.5%/yr, around 15%/yr if the last recession is any guide.

So if there was ever a time to justify skipping a mortgage payment and investing it instead – now would be it. Right?

I certainly think so.

It feels icky to not just, advocate against early payments but advocate going backward in your mortgage paydown. The numbers are sound during COVID as long as your lender’s mortgage payment skip terms are good like my lenders.

And it makes sense (just as much as anything does these days). Unemployment suddenly pays more than minimum wage so it’s not odd that there are some other oddities in the market to take advantage of.

Why I won’t actually be skipping mine

So I thought about this a lot. 

So then why am I not following through? 

Well. Aside from the fact that this isn’t the “intended purpose” for these deferrals, I actually want to be EVEN MORE aggressive than just stock investing.

I plan to buy more houses next year.

My plan is to refinance all my rental houses in Q4-2020 to get ready for some big moves in early 2021. I’m aiming to buy an apartment building to really finish off my real estate experiment.

Plus, I’m in no rush since I don’t think that house prices will be going down anytime soon, (with so much support for skipping payments, anyway).

But…

  • I’m not confident that buying stocks now will give me what I need by early 2021. (2023 – completely confident, but 8 months from today… who knows.) 
  • I don’t trust that these skipped payments won’t hurt my ability to get a big mortgage. Sure, the banks say there are no major penalties, but they still can look at my history and make up another excuse to not give me a loan. Tricky tricky… 

So for now, I’ll just be a good little mortgage payer and let my master plan unfold! 

TL;DR – Skip Mortgage Payments

  • If you’re thinking of skipping a mortgage payment just cuz – then don’t. 
  • If you want to be a bit maniacal about it… you could justify deferring payments and investing the money. 
  • I’m not doing it though because I want a HUGE mortgage later.

So, does this loophole spark some interest in other people or is it too out there? Leave me a comment, I’d love to know!



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2 thoughts on “Should you skip mortgage payments if you don’t have to?”

  1. Nice post and great to meet another FIRE enthusiast who owns real estate like myself. Wanted to get your thoughts about accepting the forbearance terms with the goal of refinancing the loans. Do you think banks would be willing to lower interest rate on the mortgage to aid homeowners?

    Charlie

    Reply
    • Oh man, I think you’re playing with fire if you want to refinance that same mortgage right after not paying them. 😛

      I would either just pay the fee and refinance (likely the best) or defer the payments if you can get nice repayment terms and already have a nice rate (like slightly increased monthly payments instead of lump sums).

      Reply

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