By Alyssa Furtado, RateHub.ca
Special to the Financial Independence Hub
Skipping a mortgage payment can seem like a good option, especially in an emergency if you don’t have a rainy day fund or savings to dip into. If you lose your job, your car breaks down, or you have any other type of unexpected expense, the option to skip a mortgage payment may look enticing. But is it worth it?
Some mortgage lenders allow you to skip a payment. Here’s what you need to know before deciding whether or not you should choose that option.
What does skipping really mean?
Sounds like a simple fix on a month when everything’s gone south, right? Not so fast. When you skip a payment, you’re not just pushing the expense back a month, you’re still racking up interest.
On a day-to-day basis, it looks like a simple monthly payment. But your mortgage payment actually has two component parts: The principal (the actual payment of the debt itself) and the interest. You don’t pay the principal, but your mortgage lender still charges you interest.
By skipping a month, you lose the chance to pay down the principal and you add on that month’s interest, which gets added to the total amount left on your mortgage.
You wind up with a higher mortgage rather than the number staying the same. The skip doesn’t freeze time. Any scenario where you add more interest should be looked at as borrowing more money.
Looking years down the line, the interest you pay after skipping will be even higher since your loan itself becomes larger. The increase won’t be huge, but if you just took on a mortgage with a 25-year amortization period, the additional interest will add up over time. If you’re close to paying off your mortgage, the interest costs won’t be as high.
Am I allowed to skip?