The Definition of a Deferred Mortgage Balance

A deferred mortgage balance is a portion of your mortgage principal that your lender moves to the end of your loan. A lender can sometimes defer a portion of your mortgage when you refinance; however, this practice is most commonly associated with loan modifications, which are used to help financially distressed homeowners avoid foreclosure.

Purpose

The primary purpose of a deferred mortgage balance is to reduce the portion of your mortgage principal that is subject to interest under your primary mortgage loan. It also reduces your primary mortgage payment by spreading out a smaller amount of your balance across your payments for the life of your primary loan. Reduced interest and principal can translate to lower monthly payments, making these payments more affordable.

Interest on Deferred Mortgage Balance

When a lender defers a portion of your mortgage balance as part of a loan modification, it creates a subordinate mortgage. The subordinate mortgage is typically interest-free, meaning that it does not accrue interest while you are paying against your reduced primary loan principal. A balance deferral made as part of a standard mortgage refinance may or may not be subject to interest charges over the life of the loan, depending on the rules imposed by your lender.

Payment of Deferred Mortgage Balance

You do not have to pay against the deferred mortgage balance held as a subordinate mortgage while you are making loan payments on your primary mortgage. However, you will typically have to make a single balloon payment at the end of the primary mortgage to cover the deferred balance. Because it can be difficult to pay off a deferred balance in a single lump sum, consider this option carefully before agreeing to a mortgage balance deferral as part of a mortgage modification or refinance. If you sell your home before you pay off your mortgage, the deferred balance is due at the time of the sale.

Limits

The Federal Housing Administration places limits on the amount of your mortgage that your lender can defer as part of a mortgage modification. Your lender may only defer up to 30 percent of the balance of your primary mortgage at the time of the modification agreement. No established limits exist for mortgage balance deferrals made as part of a standard refinance agreement.