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Loan modifications are complex animals not because the concept behind them is complicated but because of all the elements that compose it and the various options and permutations of these options that must be decided. The jargon linked to loan modifications can also make it a challenge to understand the instructions you read in the literature.

This series of articles “Loan Modification Questions” is designed to clarify some of the most important questions you can ask yourself about loan modifications as well as busting some jargon by using plain English to explain what your options are.

Loan Modifications are based on a simple concept to renegotiate a loan or mortgage in order to provide some advantage or benefit to one or both of the parties. The loan modification the government is now backing is designed to allow struggling borrowers that have some form of income and can pay their mortgage if their monthly payments are reduced, their late fees are waivered or some other modification is carried out.

One of the ways this is carried out is to capitalize or include in the loan modification costs or fees the borrower must currently pay on top of his monthly payments.

Can a mortgagee capitalize an escrow advance for Homeowner´s Association fees when using a loan modification option?
The answer is yes. HUD Handbook 4330.1 REV-5, Paragraph 2-1, Section B under Escrow Obligations states: Mortgagees must also escrow fund for those items which, if not paid, would create liens on the property positioned ahead of the FHA insured mortgage.

In other words the FHA insured mortgage must have first rights on the loans security, the house. For this to happen pending fees and costs must be capitalized into the mortgage.

Interest Rates.
One of the reasons the government is pushing for loan modifications is so that homeowners whose homes have dropped in value can benefit from the current lower interest rates. Is there a new basis interest rate which mortgagees may assess when completing a Loan Modification?
The answer is again yes. Mortgage Letter 2008-21 explains that the new basis interest rate is 200 points above the monthly average yield on U.S Treasury Securities adjusted to a constant maturity of 10 years. This links the interest rate applicable to loan modifications to Treasury Securities.
An important issue when applying for a loan modification is that the loan modified is the primary loan. Will HUD subordinate a Partial Claim, if a mortgagor (the borrower) subsequently defaults and qualifies for a loan modification?
Yes, HUD will subordinate a Partial Claim if a mortgagor defaults and qualifies for a Loan Modification.
These are just a few of the questions you are probably dealing with if you are searching for a suitable loan modification. The best advice is to ask for free advice from a government institution and ask what your options are.

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Mortgage modifications have received a lot of publicity in the media due and with good reason, millions and millions (4-5 according to government projections) will be left homeless if they don’t make appropriate loan modifications to their mortgages.

However that does not mean that loan modifications are only for the poor and destitute. We can all take advantage of the historic low interest rates and modify our loan or mortgage. Of course this is not an option that will help everyone, in some cases loan modifications cost more than they save and the only benefit they provide is to reduce monthly payments in exchange of a huge increase in interest payments throughout the life of the loan.

How can you can find out if your are eligible for a loan modification that will save you money?

1)   Check the cost.

It doesn’t get much more basic than this but it is vital that we check the price tag before we buy it. To illustrate you might have heard about companies that install solar panels to save money on your electric bill. I actually looked into one of these systems for my home and when you put figures onto paper it would have taken decades to cover the cost of my investment. I happen to believe that solar panels would be a great idea and that all new homes should be forced to have them, but you get my drift, before you “purchase” a product that provides a saving it is wise to work out exactly how much you are saving.

2)    Are you planning to sell soon?

Loan modifications take time to pay off the initial cost of purchasing the mortgage modification, often two to three years. If you are planning to sell soon you might lose money.

3)  Have you had your mortgage for a long time?

Mortgages are set so that at the beginning of the loan you pay most of the interest of the mortgage while paying most of the principal towards the end of the mortgage’s tenure. For example in the first 5 years payments tend to be broken up in 85% to pay for the interest of the mortgage and 15% towards the loan’s principal. If you modify your loan, your outstanding loan will be reset and you will begin to pay mostly interest with your monthly payments again. This could actually reduce your equity and provide little or no benefits. Therefore if you are in the final years of your loan it might be best to stay put.

Loan modifications are generally best suited for people who have recently bought the mortgage, are planning to own the home for a long time and who have excellent credit ratings. Nevertheless it is always a good idea to contact your bank and tell them you are seriously considering refinancing your mortgage, if you are a good customer they are likely to bend backwards to keep you on their portfolio whatever your circumstances are.

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Running the numbers proves a homeowner who plans to sell may benefit from paying off her mortgage.

How Do Banks Profit From Mortgage Modifications

The beauty of capitalism is that there is some degree of transparency, we expect everyone to do everything for some kind of profit or benefit. As it is often said there is no such thing as a free lunch, the world of mortgages and loans is no exception. Taking aside a couple of laudable nonprofit loan organizations, banks and lenders lend for profit, understanding how and where they make a profit can help you understand how you can save money and get a better deal on your loan modification or mortgage refinance.

Profits for banks can come from  all kinds of avenues when clients modify their mortgage or loan. This article will point out some of the basic you must keep an eye for.

Mortgage modification fees

Banks and lenders make money by moving money and papers. If you modify an option, clause or interest rate on your mortgage it is very likely this will cause you to incur in some kind of fee. This is bad and good news. If a bank is going to make money on your loan modification you don’t have to feel like it is charity, modifying your loan can be a positive thing for both of you, it also entitles you to demand a certain level of customer care.
It is important to note that banks should only include fees in a loan modification that belong to the current loan modification for reports or actions carried for the borrower, previous costs and fees should not be included in the modification.

Extending the length of the tenure.

Making a loan last for a longer time is good news for your bank and can be good news for you, mind you it can be terrible news also.  It is good news for the bank because they guarantee they are going to a return on their investment for a longer period for the same amount of cash.  This is an important point to think about. Some borrowers extend their loans without even thinking twice, not realizing how expensive it can be in extra interest.

Increasing the principle borrowed.

Just as the car salesperson tries to sell you all the extras he can a good mortgage salesperson might try to get you to increase the amount borrowed as part of your loan modification. As you probably guessed, borrowing more money will cost you more. This is fine if you can afford it or you need it very desperately, nevertheless it is worth thinking twice before digging yourself deeper into debt.
As you can see banks can actually make a profit from a modification of your mortgage making mortg

age modifications a potential win-win situation if everybody does their part. Your part is to be informed, understand your options and keep your eyes on the game.

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