Loan Modification Risks Part I
You can see the full article here:
http://foreclosurenightmare.com/loan-modification-risks.pdf
A loan modification is a change to the original terms of a mortgage. When a borrower purchases property secured by a mortgage, the lender will specify the terms of the loan. These terms include interest rate, amount of the loan, terms of the loan (number of years until the loan is paid off), monthly payment, and amortization schedule.
If the borrower is unable to make the scheduled payments, then the lender/bank has some tough choices. The lender may decide to foreclose. accept a deed-in-lieu of title or short sale or engage in a loan modification. If the borrower can prove to the lender that he has the ability to repay the loan if the lender agrees to alter some of the terms, the lender may agree to “Modify” the loan.
Here are some of the changes that may be made:
-Temporarily reduce the interest rate
-Permanent interest rate reduction
-Change amortization schedule to allow an interest only loan (no principle repayment for a number of years)
-Extend the term of the loan (ex. stretch out the loan from 30 years to 40 or 50 years.
-Any combination of the choices above
The process of loan modification is an attempt to construct new loan terms where the borrower can consistently pay the mortgage payment plus all other household bills. The lender does not want to place the borrower in the situation where the mortgage payment consumes the major part of the family budget. The lender will take into account the entire budget, including car payments, utility bills, food, and credit card payments. The lenders “loss mitigation” department will consider all expenses that the borrower will incur to live a normal life.
With an Interest rate reduction it’s the easiest way to modify a loan by lower the interest rate. Because simply put when an interest rate goes down, the payment goes down. For example let’s say a homeowner has a mortgage loan for $250,000 at an interest rate of 7.50% amortized for 30 years.
The monthly payment at 7.5% is $1748.04
The lender agrees to lower the interest rate to 4.50%
The monthly payment at 4.5% is $1266.71
That is a savings of $481.33
The sum of the total payments over the life of the loan decrease.
Find out in the next article how many load modifications aren’t working, statistics show.
www.wecallyourbank.com
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