What Is Payment Power?

Article Details
  • Written By: Melissa Barrett
  • Edited By: PJP Schroeder
  • Last Modified Date: 24 August 2019
  • Copyright Protected:
    Conjecture Corporation
  • Print this Article
Free Widgets for your Site/Blog
Doctors are about 15% less likely to refer a patient for a cancer screening in the afternoon than in the morning.  more...

September 15 ,  1935 :  Germany adopted the swastika as the official Nazi symbol as the Nuremberg Laws took effect.  more...

Payment power is the name given to a mortgage payment program developed by Fannie Mae. In essence, this program allows home owners purposely to miss two scheduled payments per year with the advanced approval of the company. The theory behind the program is that having this safety net will give home owners breathing room during times of financial difficulties and thus prevent foreclosures. Since Fannie Mae introduced the program in 2003, several mortgage companies have adopted similar programs under the same name.

Bank-supported payment postponements like payment power are not a novel idea in the financial industry. Credit card companies have historically offered “payment holidays” during the holiday season. During these breaks, the interest continues to accumulate with no reduction of the principal. As a result, these missed payments extend the actual length of the loan and increase the residual interest costs. Accepting these offers is almost universally considered to be a bad idea.

Critics of payment power programs warn that the programs share too many similarities to the credit card offers and can actually raise mortgage costs for consumers. There is some validity to those claims, as most of the programs essentially act as additional loans to the principal of the original mortgage. This results in additional interest costs and a higher monthly payment after each missed mortgage payment. In addition, many mortgage holders charge a usage fee to use the benefits. This amount is also added to the principal.


Backers of programs like payment power believe that, although the missed payments result in high monthly payments, they can ultimately save the consumer money. First, most lenders charge high fees for late and missing payments. Often, these fees are also essentially treated as loans and are added to the principal balance. In addition, late or missing payments reduce credit scores. As interest rates on credit cards and auto loans are based largely on this score, those with missed mortgage payments are often forced to pay higher amounts of interest across their entire budgets.

For those seeking protection from foreclosure resulting from unemployment, mortgage insurance may offer an alternative to payment power plans. Traditionally, these types of insurance guaranteed mortgage payment in the event of death or disability. As faith in the economy began to dwindle, more insurance companies started offering policies that also protected against income loss from involuntary unemployment. Some companies offer this insurance as a standard clause in all their mortgage insurance contracts.


You might also Like


Discuss this Article

Post your comments

Post Anonymously


forgot password?