There are times when a homeowner needs to modify his home loan, particularly when he's having financial troubles. A loan modification may be the wisest move in case you are not making your monthly mortgage payments. It may be time for you to seriously consider loan modification, just in case you are currently falling behind your monthly mortgage repayments. Through loan modification, you could make some alterations as regards the terms of your mortgage so that you'll be able to keep up with the payments and prevent the foreclosure of your property. The following details will give you more information about what loan modification is all about, why people need this, and how you should tackle your mortgage, in case you are presently having financial problems that are preventing you from making your payments.
1What Is Loan Modification?
Simply put, loan modification refers to any changes made on the initial contract between a borrower and lender. If you apply for loan modification and you get approval, you will be able to stay in your house and have a lower monthly mortgage fee; plus, all your missed or late payments are updated, as well. With a loan modification, your lender also avoids dealing with the tedious and costly foreclosure process, which means that a once negative asset can be transformed into a positive asset; and you also avoid getting a bad record on your credit report. In essence, loan modification makes things more affordable for all parties. Loan modification reduces a homeowner's monthly payments, and it saves a lender from dealing with foreclosure; thus, it's a win-win strategy.
2Mortgage Crisis Impacts On Homeowners
When the mortgage crisis hit, a large number of homeowners suddenly found themselves with adjustable-rate mortgages that initially offered rock-bottom rates. However, when the interest rates began to increase, it was also but natural for house payments to go up. Some admitted that their payments increased by more than half.
As the interest rates continued to rise, property values went down, and many homeowners were not eligible to apply for refinancing to get their finances back on track. Due to this, many lenders today are quite willing to help consumers in finding lower interest rates, whether it's for a short-term or a long-term loan. As for loan modification, there are many forms. Some have very reduced interest rates that are even much lower than the current rates.
3Changing ARM Into A Fixed Rate Mortgage
It is also possible to turn an adjustable-rate mortgage (ARM) into a mortgage with a fixed rate. There is an interest-only period, wherein a borrower will have some time to get his finances back on track. A step-rate adjustment also helps in preventing shock caused by drastic changes in rate, as it initially offers lower rates that slowly go up in increments after a few months or even years. When the interest rate is lower, you can definitely save a significant amount in just one month.
To further illustrate, it is possible for you to reduce your payment per month for your 30-year amortized mortgage from $1,330.60 to $1,073.64 by decreasing the interest rate from 7% to 5%. This means a savings of $256.96 a month, and a total savings of $92,505.60 for the entire term of the loan. When lenders were striving to stabilize the market, ARMs were almost phased out. Nevertheless, in case you have an ARM, it is still possible to change your loan terms so that you can finish paying your mortgage faster, which is a prudent move.
4Getting More Years To Pay A Mortgage
More likely than not, you are holding a mortgage with a 30-year term, and perhaps you are still looking at ten more years of loan repayments. When you pay your mortgage as soon as you can is probably a pretty good idea, which is why some homeowners are in a rush to do this. However, extending your loan can actually give you relief from debt.
Talk to your lender because he could agree to extend your loan to up to 40 years or so, based on how much time you need. Doing this does not necessarily mean that you need to make your mortgage payments for forty years. Pay extra every due date so that you can finish paying back the principal earlier. It's possible to extend the term, wherein you can also choose to make more significant payments, even though the monthly due is smaller. With this plan, you'll be in a better position to make budget adjustments in case there are problems with your finances.
5Making Home Affordable (MHA) Programs
It is possible for your lender to reduce the unpaid principal amount that you owe, even though this may not be enough to make your loan more affordable for you, by altering its interest rate and term. This strategy actually forgives a part of the debt that you owe. More and more lenders are using this method because they can still get back a certain percentage of their losses through the U.S. Treasury. A portion of the debt is transferred to the principal forbearance in case of payments deferred. If you fail to make one payment, your lender has the right to impose late fees and other suitable penalties ,as well.
6Late Payment Penalties And Schemes
Lenders, in general, utilize many different methods to collect late or missed payments, including additional fees or penalties, which can also be negotiated. Capitalization usually includes penalties and other charges that are added to the current balance, which you have to pay together with your loan. Remember that penalties and other related fees often include interest that you should also pay.
It is up to the lender to decide to forgive the extra charges that come with your loan, and he could also agree to a new payment plan that may offer a way for you to get around the interest. Typical suggestions include paying penalties in installments for a specific period rather than paying it all at once, which can be very costly. Even though your loan may be accumulating fees or interest, this will allow you to keep your assets, and it also gives you more time.
7How A Lender Process A Loan Modification
Once a borrower applies for loan modification, the lender will then recalculate the loan, which is a process that's also known as re-amortization, wherein the monthly payment is computed based on certain alterations to the loan terms, such as extending the term, reducing the interest rate, lowering the principal amount, or changing the fees and other penalties (capitalization). Lenders can alter your mortgage through loan re-amortization that covers a specific period while still keeping the same loan maturity date. In case you opt for this, check out the last payment you made.
Suppose you have already paid for a decade on a 30-year loan that you got in 2000, your lender can still re-amortize your loan for thirty years and recover the full amount in 2030. In this example, your monthly payments will be lower, but you will have to pay a lump sum once the year 2030 comes. A lot of homeowners aren't fully aware of their options, as they only know that they either make the payments or relinquish their property.
Hopefully, the information above will help you in deciding whether or not you need to modify your loan. In case certain issues are still a little confusing to you, talk to a real estate or finance expert to gain valuable advice. Allow an experienced professional to evaluate your financial standing so that he can tell you whether or not it's the right time for you to apply for a loan modification.