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Loan Modifications and Home Refinancing are been talked about so much they are becoming the most used financial buzzwords by homeowners nationwide. This doesn’t mean people understand the differences or the financial consequences of either of them.

This article seeks to look into the pros and cons of Loan Modification and Mortgage Refinancing and to provide clear guidance to when it is best to modify your existing mortgage or to refinance it altogether.

Let’s start with some basic definitions for Loan Modification and Mortgage Refinancing so we are on the same page on what we mean by these terms.

Loan Modifications.

Loan modifications are used as a tool to lower the monthly payments of troubled homeowners. The whole purpose is to help people that are struggling to pay their mortgage by either lowering their interest rates, extending the term of the loan or in some cases reduce the principal balance of the loan.

You do not need to have equity on your home to apply for a loan modification, the government is actually subsidizing loan modifications through the HAMP program so that more homeowners can qualify.

Mortgage Refinancing.

Mortgage refinancing is a way for borrowers to get a better deal on their mortgage. You effectively pay off the current mortgage and negotiate a new mortgage with better conditions. This can mean lower monthly payments, lower interest rates, a shorter loan term, which reduces the cost of the loan, or a safer interest rate type (fixed, variable, ARM)

You can refinance with your existing lender or with a new lender. You do not need to be in financial difficulties to apply for a mortgage refinance. You will generally need to have some equity on your home for a lender to agree to refinance your home and be able to afford the new monthly payments which will not be necessarily be lower.

Which is the best for you?

This is a question only you can answer, because it completely depends on your personal circumstances. Here is how you work out which is the best option for you:

1)      Do you have equity on your home?

Or put another way is the current value of your home lower or higher than the pending balance of your mortgage.

If you have negative equity, or owe more than the house is worth, then you are really going to struggle to refinance your home unless you are willing to pay ridiculously high interest rates, extend the term of your loan or/and increase the cost of your monthly payments. You don’t have to be a finance guru to know that is not what you want. If you are in negative equity nine times out of ten you are better of getting a loan modification, which in its current form was pretty much designed to help out borrowers in your situation.

However if you are fortunate enough to have a decent equity on your home you are very likely to find a lender that is willing to refinance your mortgage with a better deal; especially if you bought your mortgage a few years ago when interest rates were higher.

2)      Are you worried about your credit score?

Loan modifications affect your credit score whatever your lender has told you. Refinancing your mortgage does not affect your credit score negatively, it might even improve it. It is true the government has created a new “label” for people that apply for loan modifications which in theory will not affect your credit score but the truth is that it will; if not right now it will in the near future. Banks and lenders are wary, quite understandably, of customers that ask for breaks on a loan agreement, and that is what you are doing when you ask for a loan modification.

Nevertheless if you are struggling to make it to the end of the month and have little or no equity your goal is to save your home and your credit rating is probably the least of your worries. Get a loan modification.

3)      Does it reduce your interest rates?

This is the big question. Whichever road you take, Loan Modification or Mortgage Refinance you need to make sure your interest rates have dropped or you principal loan balance has been reduced, the latter is very unlikely I’m afraid. If your interest rates are not lower any savings on your monthly payments are going to cost you in the long run, look for a better alternative.

To illustrate, refinancing your mortgage could cost you anything from 0% to 3% of the balance of your mortgage but if you negotiate a lower interest rate, preferably a lower fixed interest rate, then you could recoup your costs in three to six months. If your interest rates have not dropped you are just giving your money away to the bank.

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Do loan modifications affect your credit score? Should they? Why should you care?

Credit scores are a numerical value credit bureaus place on a borrower as a way of measuring their reliability. It is in the interest of lenders to report any delinquent activity to the credit bureau. In fact some would argue that it is in the interest of everyone as delinquent borrowers make loans more expensive for everyone by forcing lenders to increase interest rates to pay for bad loans. This is why potential borrowers that have bad or low credit scores find it harder to get loans approved or have to pay a premium for the privilege.

Borrowers that don’t make one or various payments are marked by a special code that informs other lenders of the situation. Borrowers that are granted a reduction of their loan balance or monthly payments due to financial difficulties are also marked with a special code called AC. This code can reduce the credit score of a borrower by anything between 30 and 100 points and tells lenders that the borrower had only made a partial payment.

The problem arose when troubled borrowers entered the loan modifications sponsored by the government and were granted loan modifications without ever having missed a payment but were still marked with AC as it was the closest fit in the “system”.

The Obama Administration felt it was unfair to harm the credit scores of borrowers that sought a loan modification. Therefore a new code “CN” was thought up which will not have an impact on credit scores for now.

The question is if this will change. Will the code CN affect the credit score of borrowers in the future? This is still to be determined. It will depend on if FICO, the company behind the most popular credit score formulas, decides the appearance of CN in a credit report increases the chances or is predictive of delinquent behavior.

It is worth noting that borrowers that enter into a loan modification are asking for a reduction of their loan and are therefore not wonderful news for lenders that are looking for reliable customers. It is not at all clear to me why it is wrong that their credit score is somewhat affected.

However what is certain, and this is what worries the Administration is that borrowers with a good credit history will shy away from a loan modification that threatens their credit.  Lenders might argue that borrowers who feel they have a choice and prefer not to enter into a loan modification that would damage their credit don’t really need it and can very well pay the full loan, thank you very much.

How you feel about the matter may very well depend on which side of the fence you are looking from. The Obama Administration wants to give HAMP the best chance possible and is eager to erase any bad publicity the program attracts even if this means fudging credit reporting codes. Whether these measures are long lasting or not will depend on the performance of borrowers that enter into a loan modification, it must be said at this stage that things don’t look all that good.

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Despite the governments efforts to provide loan modifications for individuals and families in financial difficulties that are at risk of foreclosing on their loans the mortgage aid seems to be moving too slow for all the families to benefit from it.

This has made many experts to question why banks are moving so slowly to take advantage of a program that is designed to help both the borrower and the lender. The idea is that mortgage modifications benefit both borrowers and lenders as they allow banks to receive payments they would not get if the mortgage foreclosed in a buyers market where the security (normally the house itself) is in negative equity.

However recent research quoted in today´s Washington Post indicates that this only holds true with a certain kind of borrower, the type of borrower that truly can´t pay the monthly mortgage payments at the current level but would be able to pay them if the monthly payments were reduced. This is only one of three types of borrowers though. It seems that with the other two types of borrowers, loan modifications are just not cost effective.

These two types comprise:

1) Borrowers that are in such financial strife that no loan modification or mortgage refinance is going to help in the long run, ultimately they are going to have foreclose their loan.

2) Borrowers that can meet the payments even though this might mean serious financial difficulties, even losing their life savings.

Banks and lenders have little incentive to help either of these demographics of borrowers.

To illustrate imagine if you were a lender, a bank or even a private company that provided loans for a profit. Obviously you demand some sort of security to protect your investment in case the borrower cannot or will not pay, this could be  jewelry, thee deeds of a property or a car. Then one day the borrower tells you he is going through financial hardship and needs a break in his payments, a reduction in his debt or his monthly payments. However you realize that this borrower is not going to be able to pay his loan whether you help him now or not. Negotiating with him now is just going to cost you money in time, work and whatever reduction or break you provide for his loan. On the other hand you could simply foreclose his loan and claim the security without losing nearly as much. What would you do?
Even the kindest philanthropic can see the negative incentive that such a lender would have to actually negotiate a solution with the borrower.

Could  this explain why loan modifications are moving so slowly despite the huge incentive programs the government is providing to encourage loan modifications on mortgages that risk foreclosure.

It seems that Obama´s administration has also seen this flaw in their system and is currently negotiating with banks for further incentives for the provision of loan modifications to the most vulnerable borrowers.

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Desperate situations elicit desperate measures. Many families are certainly living in desperate situations due to the current worldwide economic crisis with millions of families losing their homes in the U.S alone. These families and households are reaching levels of desperation where any option that provides an ounce of hope or even a temporary respite is considered. What options do they have?

Although there are various viable options open to borrowers in financial difficulties there are also some terrible options open for people that don´t understand the consequences of some of the ”solutions” borrowers provide. An inspiring story that hit the news this week was that of a recently divorced lady that was about to foreclose on her mortgage. Instead of accepting the charity of friends she sold double decker apple pies to friends and neighbors. The story touched many around her world and her business went international in the process saving her from losing her home.

Not all of us can imitate such feats of entrepreneurship but we can all make steps to increase our income and reduce our at least manage our debt. The first financial crouch borrowers seem to grasp for are credit cards. Credit cards are handy financial products that provide quick cash when needed; they are not a useful way of finding money to pay for loans. Paying loans with credit cards is like selling your car to by fuel, not very clever. To illustrate this just have a look at the interest rates credit cards charge, anything between 11% and 19%, even more in some countries and compare it to interest rate of a personal loan, car loan and a mortgage. It is much better to modify or renegotiate your current mortgage, take on a personal loan or even negotiate with you lenders than fall into the slippery slope of credit card debt. Another bad choice is to do nothing when you find you are not going to be able to pay your mortgage or loan payments.

It is vital to talk to your lender and find a solution you both can live with. Many banks and lenders will provide a number of breaks or solutions to borrowers that come out in the open when struggling to meet mortgage or loan payments. For instance if you are waiting for a large sum of money or are expecting a rise in income (that you can prove) lenders are often willing to provide a “payment holiday” for a set amount of time to help you get on your feet. Doing this instead of sticking your head in the ground and just letting things happen also has the benefit of not affecting your credit record which will be destroyed if you simply stop paying your loans. If you are unsure on how to deal with your debt problems be smart and talk to someone that can help you. This website describes some of the steps you can take to alleviate the stress and problems caused by debt and bad management. The choices you make will decide your financial future.

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What Is A Home Loan Modification

Home loan modification, or mortgage modification are words that are heard a lot lately in the media, in the kitchen and in the office. More and more people are having a struggle to pay their home loans and are looking for a way of lowering their monthly mortgage payments. Others have heard that interest rates have dropped (they have, and a lot) and want to know if they can also save on their monthly expenses, nobody likes to pay more than they have to, right?

But when asked what a loan modification is exactly, many are unsure. In fact some rather surprising definitions have come up linking loan modifications with bailouts, foreclosure and other banking terms that although sometimes related are by no means synonyms.
So what is a loan modification? A loan modification is a permanent change to one or more terms in a loan or mortgage contract. Often loan modifications occur when the borrower cannot afford the mortgage payments due to a rise in interest rates or a loss of income. The loan modification allows the loan to be reinstated avoiding foreclosure of the mortgage, which is bad news for both the borrower and the lender. The loan modification makes the loan affordable for the borrower that can continue to pay the home loan.

Of course loan modifications do not only occur when the borrower is in financial difficulties it can also be used as a way of finding a cheaper loan or as a marketing tool by banks who want to attract more customers.

Whether you are looking for a home loan modification because of financial strife or because you want a better mortgage there are three main ways you can modify your loan. These loan modifications are often combined to create a loan modification the lender and borrower can agree on.

Lower interest rates.
This is often the selling point of a new borrower offering to buy your mortgage and sell it back to you at a lower interest rate. This is the best kind of loan modification for a borrower because it lowers your monthly expenses and the overall cost of the mortgage.

Longer loan tenure.
This means that the lender “allows” the borrower to take longer to pay the loan. This can be good for the borrower because it reduces the monthly cost of the loan. However it has the effect of increasing the amount of interest the borrower pays.

Larger loan.
This is a home loan modification banks love. Increasing the home loan can be a great way of paying for other debts and consolidating them in one big loan. This can be a good idea for borrowers that are paying high interest rates for other debts like credit cards or car loans and would prefer to include it in their lower interest mortgage payments.

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What Is A Home Loan Modification

Home loan modification, or mortgage modification are words that are heard a lot lately in the media, in the kitchen and in the office. More and more people are having a struggle to pay their home loans and are looking for a way of lowering their monthly mortgage payments. Others have heard that interest rates have dropped (they have, and a lot) and want to know if they can also save on their monthly expenses, nobody likes to pay more than they have to, right?

But when asked what a loan modification is exactly, many are unsure. In fact some rather surprising definitions have come up linking loan modifications with bailouts, foreclosure and other banking terms that although sometimes related are by no means synonyms.
So what is a loan modification? A loan modification is a permanent change to one or more terms in a loan or mortgage contract. Often loan modifications occur when the borrower cannot afford the mortgage payments due to a rise in interest rates or a loss of income. The loan modification allows the loan to be reinstated avoiding foreclosure of the mortgage, which is bad news for both the borrower and the lender. The loan modification makes the loan affordable for the borrower that can continue to pay the home loan.

Of course loan modifications do not only occur when the borrower is in financial difficulties it can also be used as a way of finding a cheaper loan or as a marketing tool by banks who want to attract more customers.

Whether you are looking for a home loan modification because of financial strife or because you want a better mortgage there are three main ways you can modify your loan. These loan modifications are often combined to create a loan modification the lender and borrower can agree on.

Lower interest rates.
This is often the selling point of a new borrower offering to buy your mortgage and sell it back to you at a lower interest rate. This is the best kind of loan modification for a borrower because it lowers your monthly expenses and the overall cost of the mortgage.

Longer loan tenure.
This means that the lender “allows” the borrower to take longer to pay the loan. This can be good for the borrower because it reduces the monthly cost of the loan. However it has the effect of increasing the amount of interest the borrower pays.

Larger loan.
This is a home loan modification banks love. Increasing the home loan can be a great way of paying for other debts and consolidating them in one big loan. This can be a good idea for borrowers that are paying high interest rates for other debts like credit cards or car loans and would prefer to include it in their lower interest mortgage payments.

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Are Loan Modifications Worth the Hassle?

Loan modifications can help you or can sink you. They can give you a break and allow you to afford your monthly payments or even pay off your mortgage sooner or with a lower interest. Unfortunately they can be the worst financial mistake you ever made. This has caused many to ask themselves if weighed in the balance of common sense are loan modifications worth the time and hassle.

The quick answer is quite predictably, it depends.

It depends why you want the loan modification and what kind of loan modification you need.

There are two main reasons for loan modification we will analyze in this article, financial duress and trying to get a better deal.

Loan modifications for those in financial difficulties.

In the last year the number of mortgage foreclosures  due to financial duress has reached the estimated number of 4.5 million. These homeowners cannot meet there monthly commitments and are defaulting on their home mortgages. Loan modifications for them are a must if they want to keep their home. The governments worldwide, and the U.S are no exception, are doing a lot to supply ways out for those that cannot afford their mortgages. In these cases loan modifications are very often worth it. What can you do to save your home with a loan modification?

However let’s start with a fact that many ignore, loan modifications don’t have to cost you anything. In their most basic form they are an agreement between you and your bank’s loss mitigation sector. As we have repeatedly said in our articles foreclosures are a lose-lose situation, the client loses, the bank loses and the economy as a whole suffers. This means that banks will work with you, up to a point, to modify your mortgage if you are undergoing financial hardship.

A loan modification could increase the time you have to pay back your mortgage, reducing the monthly payments but increasing the overall cost of the loan or mortgage. A loan modification could also consolidate a number of debts into one large loan which could also reduce the monthly expenses of a family.

Loan modifications for those in search of a better deal.

The current drop in interest rates has caused many to wish their interest rate was as low as the current going rate. It’s like when you buy yourself a new car and find out 2 weeks later they dropped the price by $5,000 you obviously wish you had waited but nobody is going to buy it off you now and resell at a lower price.

Happily some banks are willing to do that with your mortgage. This can produce great savings on homeowners that can reduce their mortgage’s interest rate. There is the danger of hidden costs and increased debt.

Many loan modifications can look great and shiny from a distance but hide closing fees and other nasty surprises. Before you sign anything ask for a detailed summary of costs and savings and make sure what closing fees your current lender demands and what expenses your new lender is willing to cover.
If in doubt contact a qualified financial adviser that can help you make sure there are no surprises in your loan modification.

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Has The Mortgage Refinancing Season Ended

Mortgage refinancing has become as exciting as watching the stock market. The once droll and wonderful (for home owners) business of seeing interests remain pretty much stable while house prices increased with any sign of stopping has been exchanged for the much more exciting activity of seeing how low the interest rates can be dropped and how far the Government can bend back to lower them further.

This has created an excellent opportunity for those conservative people that were boring and smart enough to save when everybody was spending of being prudent when prudence seemed pointless, because if you have cash now and an excellent credit score you could get the deal of your life. With 30 year interest rates at historical lows you could buy the house of your dreams for around 4.25%.

This window of opportunity is of course not the main outcome the Government is working towards although it may very well prove to be a benign side effect that can further contribute to jump start the credit and housing industry.

The main issue Government is trying to deal with when lower is as we mentioned to incentivize the buying of new and built homes while giving home owners that have fallen in financial difficulties the possibility of renegotiation their mortgages at a more advantageous rate of interest. If a family renegotiates their mortgage wisely the significant drop in interest rates could mean the difference between affording the monthly mortgage payments and not.  For those home owners that are not in any particular financial strife it can mean paying off the mortgage sooner or financing the purchase of a car or a home improvement on the interest drop.

However the fear for those that are planning to modify their loans  or are in the process of getting their paperwork or credit in order is that they will miss the train. That the Government’s incentives will work raising interest rates and closing the window of opportunity that currently exists.

Should we worry?
If we are to trust the Mortgage Bankers Association’s chief economist the answer is no. Jay Brinkmann the MBA’s chief economist predicts that in the next the current interest rates should hold for the next six to seven months. That is music to the ears of home owners that see how their loan modification and mortgage refinancing procedures take more than they expect or is experiencing delays in getting to the closing table.
If you are wondering who to thank for the drop in interest rates thank the Uncle Sam for investing so heavily in Banks, providing cheap money for banks to invest in insured loans and mortgages.

The sobering question is how long can this continue for, the short to mid-term may be safe but can this continue in the long term? It can’t if you listen to Dan Cutaia, president of Fairway Independent Mortgage Corp who recently said at an MBA’s conference: “The government can’t keep printing money and buying mortgage backed securities forever”.

Historically the secondary housing market has been a meeting place for investors and borrowers where offer and demand created its own prices and conditions. The government has modified the “natural” state of things by using its muscle to provide the money few are willing to invest.

What will happen in the long term is a bridge we have yet to cross, however if you are currently in the market to refinance or buy a home don’t worry you will not miss train, low interest rates are here to stay, for now.

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Keep Your Finances Afloat With Suitable Loan Modifications

You don’t start worrying when you hit the iceberg; you make sure you are working hard to avoid foreclosure or financial duress as soon as you hear the radio signals warning you of danger. Just as Titanic was prey of bad planning, pride and reckless behavior many of us fall prey to foreclosure and financial difficulties when there is really no need for it.

This is not rocket science, we all start saving on non-vital aspects of our monthly spending when we our income is reduced or we fear we might lose our job. However we often think of our mortgage as a fixed expense that cannot be modified or fine-tuned. The reality is completely different. Mortgage providers like banks and other lending institutions know too well that many borrowers and their families are struggling and they appreciate responsible clients that are willing to make sensible modification or changes to their mortgage than simply foreclose or claim bankruptcy. Here are some basic steps to keeping your family finances afloat by fine-tuning your mortgage.

1) Be sensible in the percentage of your income that is used to pay your mortgage. A conservative rule of thumb is to not spend more than 30% of your total income on your mortgage. The origin of this guideline is quite interesting. Apparently it began when railway companies started to spread over the continent and supply housing for their workers, they would charge a week from every month of their wages for housing. Situations have changed completely and this rule is obviously not set in stone but if you are spending much more than 30% on your house you are probably spending too much and not leaving yourself with much room for maneuvering in case of financial difficulties.

2) Don’t remortgage to “invest” in your home. Too many have fallen in the trap to remortgage their home to invest in house improvements. If you need the house improvements and you can afford them I would recommend saving for them or if you really must borrowing for them , but don’t view them as an investment that elicits large lumps of cash. In the current market you are very unlikely to get your investment back and quite likely to pay dearly for the loan increase.

3) Talk to your bank as soon as possible if you see trouble.  Banks appreciate customers who will be candid and realistic about their situation and are much more willing to renegotiate when you are not in the red yet. If you are expecting a large payment or your income is seasonal you might be able to renegotiate a payment holiday for a certain amount of time. Remember that banks are likely to make money or loan modifications like this instead of losing a lot of cash when a client forecloses their mortgage.

4) Don’t panic. Talk to an experienced financial advisor or to a trusted and knowledgeable friend. Bad situations can often  be averted or fixed if caught in time.

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Do’s and don’ts of mortgage refinancing.

This is not a very technical article. If you are a mortgage refinancing guru you will most surely be bored and completely unimpressed with the advice it contains. However the truth is that making good and bad decisions is not a technical issue it is rather simple to apply common sense to your mortgage refinance choices.
However common sense tends to be rather uncommon especially when we are dealing with emotional issues like refinancing a house and dealing with money you will never actually see. Refinancing a mortgage can be like using a credit card it can be awfully easy to spend without realizing the real cost and spend more than you wanted to or could actually afford.
Here is a completely incomprehensive list of do’s and don’ts that should help jump starting your common sense before doing anything crazy.

Do not..

Trust lenders who are too eager to lend you more money. Borrowing more money is always expensive and lenders who are very free with their cash are probably charging high interest to cover for borrowers that default on their payments or worse have “other” methods to guarantee the loan payments.

Sign a loan without working the real cost of refinancing. When you ask a bank or are offered a refinancing deal on your mortgage find out the real cost/savings on the loan modification. Unless you are in serious financial duress I would recommend never borrowing more but only reduce the tenure, the interest rate or preferably both. Now is a good time to modify your loan because interest rates have dropped so much. However if you refinance your mortgage with a new interest but extend your tenure you will end up paying more for your mortgage which is counterproductive unless you are in serious financial difficulties.

Do

Check the closing fees on your existing loan.
Modifying your loan at current interest rates is generally a good idea that makes financial sense but that depends completely on the overall costs of the loan modification or switch. If your current bank charges you a 5% fee for pre-paying or switching your mortgage you might lose money on the switch regardless of how good the new interest rate is.

Have all your paper work organized in a file.
With mortgages, loans and other financial products paper work is really just that, what makes things work. If you know what paperwork you need and you have it organized in a simple and accessible way you will save time, stress and money.

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