Borrower's Choice: Pay Now, Pay (More) Later

Ever gotten an offer in the mail to skip a payment on your mortgage or home equity loan? It happens all the time.

The basic pitch is that you can skip a payment now, and the lender will just extend your loan by a month on the back end, so you will pay it later.

Jim Cosman is a vice president with Sovereign Bank in Boston, which makes this offer to people with home equity loans.

"It's a payment holiday," says Cosman. Sovereign permits borrowers to have one payment holiday in the summer and one in the winter, around Christmas.

So what's the catch?

"One of the ways we do make some money is they pay a little more interest," Cosman says.

If your monthly payment amount is $500, by skipping the payment until later you are, in essence, borrowing an additional $500 at the interest rate on your loan.

Now, if you are doing that just once with a home equity loan that is around 6 percent and using the extra money to pay off a credit card bill with 20 percent interest, that might be a good idea.

But consumer advocates say you have to resist the temptation to do it more than once.

Kathleen Keest, with the Center for Responsible Lending, says the problem is that people get used to skipping payments twice a year. That causes them to pile up thousands of dollars in deferred payments and extra interest.

There are also fees associated with taking a payment holiday. Sovereign charges a $35 fee for every skipped payment, and some banks charge twice that much.

So, Keest says to do the math. If you do, skipping a payment might not sound like such a good deal.

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