Loan Modification Risks Part 2
You can see the full article here
http://foreclosurenightmare.com/loan-modification-risks.pdf
The 2nd way a loan mofication is done is Amortization Term Increase
The typical mortgage term is 30 years. The loan is “amortized” or paid back with principle and interest over a 30 year period. In order to make the loan more affordable, the lender may offer to extend the term of the loan to 40 or even 50 years. Here is the effect on a $250,000 loan at 7.5% for 30 years:
30 Year Term Loan the monthly payment is $1748.04
Now, extend the term of the loan:
40 year term loan, the monthly payment is $1645.18 a savings of $102.86
50 year term loan, the monthly payment is $1600.58 a savings of $147.46
Notice that the savings is small but the total payments over the term of the loan increases dramatically with an Amortization term increase. (A great advantage to the lender). This may be the least attractive option to the borrower.
The 3rd example is the Principle Balance Reduction
Of all loan modification options, the principle balance reduction is the most attractive to the borrower. The lender is actually reducing the balance due on the loan. For example, if the original loan was for $250,000, the lender may be willing to reduce the balance down to $200,000 in a severely depressed real estate market. Once accomplished, the lender is required to report this loss to the shareholders, and as a result, principle reduction is the least favorite modification to the lender.
The principle balance reduction has the effect of reducing the monthly payment and the total payments over the life of the loan. Example:
The original loan amount $250,000- Principle Reduction $50,000= New Balance $200,000
Interest Rate-7.5% Term 30 Years
Monthly Payment on $250,000: $1748.04
Monthly Payment on $200,000 $1398.43
Savings is $349.61
Not only does this reduce your monthly payment, the principle balance reduction greatly reduces your total payments over the life of the loan.
The 3rd part to our Loan Modifications Risks will show statistics, the pie chart is in the full article PDF link above.
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