Loan Modifications: Good or Bad?
Chances are that, if you are considering a loan modification, you have already made some poor decisions that have resulted in you needing a lot of help fast. The last thing you want to do now is dig an even deeper hole by making yet another uninformed financial decision.
Mortgage modifications are not a good choice for everyone and there are some things you may need to consider before applying for one.
Loan Modifications have some flexibility with options for newly negotiated terms. Your interest rate may be decreased to as much as 3 to 7 percent and the loan term can be modified and stretched out to allow a longer repayment period. The balance on the loan can also be adjusted if the balance owed on the home exceeds the existing value of your home.
Most loan servicers follow federal government guidelines. Simply put, your loan payment should ideally be less than 33% of your income. To achieve this the lender’s primary option is to adjust your interest rate to lower the payment. The next step is to adjust the term of your loan so that you pay a smaller amount for a longer length of time. However, if neither of these options gets the payment low enough, the lender would need to forgive a portion of the loan.
The time for most loan modification approvals is between 30-180 days and unfortunately this still has not prevented foreclosure for many homeowners. Many homeowners have found themselves being evicted while still waiting for their lenders to deliver a decision.
If you are one of the fortunate who is actually able to get an approval on a loan modification, often times your challenges are just beginning. While mortgage modifications are designed to lower your payments, all of those months of back interest can be added back onto the loan. The loan terms may be balanced out by lenders extending the lengths for up to 40 years, which may initially feel like a relief but can mean paying thousands of dollars more over the life of the loan.
Ultimately, whether you choose to apply for a loan modification or not, it’s important to keep in mind that these loans are meant to be a temporary solution in a dire financial situation. It’s important to focus on being much more responsible with your income to get out of debt and pay off your loan as soon as possible, no matter how that is ultimately done.
Would you like help considering whether a loan modification is right for you? Contact a FAIR Counselor for free assistance.