This is important for all homeowners to know. And yet, most do not. You’ll want to pass this on to other homeowners.
Most people think a mortgage loan modification is a good idea. Many people who don’t get one are envious of those who do. Many who don’t need one feel angry at the idea that even though they pay perfectly on time for years on end, they don’t “get a break” like those who get a loan mod. BUT WAIT! There’s a lot of misunderstanding tangled up with those emotions.
First, a loan mod is not the great blessing to the homeowner that many think. It’s actually doing the lender a favor first.
A loan modification (mod) is when a homeowner cannot pay the mortgage due to a temporary hardship, so the lender modifies the contract to allow them to pay less for a specified period of time and at the same time, the unpaid portion of their regular payment gets tacked onto the end of the loan term. (Or it might be a “shark agreement.” See Beware below.)
Here is how that helps the lender:
- They don’t have to go through the expensive process of foreclosure and resell.
- They make more money in the long run, because the unpaid portion of the payment that is tacked onto the end of the loan earns them additional interest profit.
- It’s good publicity, because it makes them look like good guys rather than bad guys.
Here is how it helps the homeowner:
- Instead of losing their home to foreclosure, they get time to get their finances back on track.
- They aren’t forced to sell their home, which is stressful and time-consuming; plus, finding a place to rent can be difficult.
Good or Bad Idea?
A loan mod is a temporary band-aid. If paying the extra interest that it will cost you is worth the benefit of receiving a temporary financial break, then it’s a good thing. Possibly even a godsend. If your financial hardship is temporary, and you will be able to resume the payments — as set forth in the loan mod agreement — then it’s a good thing.
However, if the loan mod is prolonging the inevitable loss of your home, then better to sell sooner so that you don’t lose more of the proceeds from the sale (the cash) to the lender.
If you don’t truly need a loan mod, then applying for one is a stupid/misguided idea. The bank is not doing you an act of charity out of a loving heart with the loan mod. They are making a financial move that helps their own bottom line in the long run.
Some loan mod agreements are better than others. Read every word. Get a contract expert to help you read it. Notice if the contract requires you to pay all of the unpaid portion as a giant lump sum payment as soon as the loan mod ends. If so, will you be able to do that? Some loan mod agreements don’t let you extend the payments beyond 30 years; instead, they increase your payment immediately when the mod period ends. Will you be able to handle that payment?
Know exactly what you’re getting yourself into before you sign, then you will be able to make an intelligent, informed decision.