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Loan Modification consultants have being saying it for a long time; the best loan modifications are those that reduce the balance of the loan. This might seem obvious; of course borrowers are going to prefer loan modifications that reduce the amount they owe. What is not so obvious is that these types of loan modifications may be the best kind for lenders too.

Loan Modifications can use a variety of tools and measures to reduce the monthly payments of a mortgage. Reducing monthly payments is considered to be the main objective of a loan modification, as a way of giving troubled borrowers a break so they can continue to pay their mortgage. This can be done by:

1)      Reducing the interest rate of the mortgage, either temporarily or permanently.

2)      Extending the term of the loan, which means giving the borrower longer to pay the loan back.

3)      Rolling interest payments to the end of the loan, this reduces monthly payments but creates a huge payment at the end of the loan.

4)      Principal reductions of the loan balance. Here the bank or lender “forgives” or writes off a portion of the loan.

The Obama Administration does not control which measures lenders use on loan modifications and they certainly don’t require lenders to cut mortgage principals, what’s more, until recently principal reductions seemed unthinkable, a nice idea but not very practical. It must be said that forgiving debts is a nice thing for friends to do, but it doesn’t sound like a good way for lenders to do business.

However, recent reports are showing that principal reductions could be a key factor in creating cost efficient loan modifications for both lenders and borrowers. One of these reports was published by the Lender Processing Services June 2009 Mortgage Monitor and concluded that re-defaults on loan modifications with a principal reduction element fare much better than those based exclusively on interest rate reductions. The report states that “the success rate for loss mitigation-related loan modification hovers in the 30-40% range, with a higher success rate for loan modifications involving a reduction in unpaid balance.

The success rates of loan modifications with principal reductions is so much better than with other methods that lenders are beginning to listen to the data and increasing their principal reductions on mortgages of troubled borrowers.

You might still ask yourself why banks or lenders would be willing to cut unpaid loan balances instead of using other apparently cheaper measures. The key, we hinted at above, are foreclosures. Foreclosures are expensive for lenders, selling in a buyers’ market and the costs associated with selling a property are not cheap.  Having said that any kind of loan modification carried out to avoid foreclosure is expensive for lenders whether they reduce interest rates, extend the term of the loan or reduce the principal balance, what makes it even worse is when borrowers re-default on their loans after the loan modification. Because foreclosure re-defaults are much lower on loan modifications with principal reductions, lenders are starting to think they might be cheaper in the long run, which is good news for the fortunate few that actually qualify for a loan modification.

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Reading the news for the last two weeks you would either think the government has the credit crisis in control after hitting its 500,000 trial loan modifications or that there is no hope after seeing the rise in prime mortgage foreclosures and the rise in unemployment.

The truth is that nobody really knows what is going on right now in the economic arena. Last week Citigroup lowered their “emergency fund” for bad or non performing loans which surprised analysts that fail to find evidence of an improvement of credit payment ability.
Loan modifications can be a great solution for some. For others it is not a possibility or simple will setback the inevitable with hard earned tax dollars.

Loan modifications are not for everybody because loan modifications can only “attack” certain causes of high loan payments, namely high interest rates, length of tenure, interest stability  and principal payment structure.

This means that if you already have a long mortgage (30 or 40 years), it is a fixed mortgage (as opposed the a variable or ATM mortgage) and low interest rates there is not much a loan modification can do for you because you already have a “good deal”.
All is not lost though. There is one option left open for you that might just be the difference between foreclosure and saving your home, and that is balloon payments.

What is a balloon payment?

Balloon payments are a kind of interest break your mortgage provider gives you so your monthly interest payments are not so high. Let’s explain with a simple example. Imagine you owe your bank $100,000 your interest rate is around 3% which means you will pay around (probably a little less)  $3,000 interest the first year. However what your bank or mortgage provider can do in order to lower your interest payments and therefore your mortgage payment is defer a portion of your principal to the end of the mortgage “forgiving” the interest on this amount until the end of the mortgage. Going back to our little example, your bank might defer $20,000 leaving you with “only” $80,000 to pay for, dropping your first year interest payments by over $600. We have oversimplified this example heavily, but you get the idea.

The only catch with this option is that you are leaving yourself a lot of principal to pay till the end of your mortgage. If you are planning to sell your home in the near future this might not be a problem. But if you want to keep it long term you are going to have to find the way to pay the “balloon payment” once your mortgage tenure is over.

Balloon payments can be used as yet another tool to reduce your monthly payments by combining it with other options that might be open to you. Research all your options and contact an expert. Experts will not cost you money because the government is providing the best advice for free.

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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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If you have a mortgage and you have been keeping an eye on the interest rates lately you are likely to have shed your share of tears. Interest rates in some cases have dropped by over 2% which means thousands and thousands of dollars extra interest you shouldn’t have to pay. You obviously would like a piece of the action and reduce your interest rate, who wouldn’t?

Now that sounds all very good but is it realistic to think you can save money on your mortgage by changing your mortgage to the current interest rates? It depends, it is possible to change mortgages to a lower interest rate and that can save you a lot of money, but it is also true that modifying your mortgage could also be an expensive and uneconomic move for you.

So what are the expenses, the real cost of low interest mortgage refinancing.
Prepayment penalties. These are often the mother of all mortgage refinancing expenses. Lenders often “protect “ their interests and avoid clients changing to cheaper loans by inserting clauses in mortgages that establish that paying the mortgage early (and not paying a whole lot if interest in the process) incurs a penalty to compensate the lender. The penalties can vary from a percentage of the amount of the principal paid to a fixed amount like 6 months interest payments upfront. Check carefully what interest rates you must pay before deciding to change mortgage provider.

Application fees.
The current economic crises that has caused so many to lose their income and consequently their homes has also had the effect of jumpstarting a new industry, loan modification advisors. These companies will ride you over the rocky terrain of loan modifications. Most of us don’t need them as the steps you need to take are rather simple. Whatever you choose to do remember they cannot guarantee you any outcome and that they can’t do anything you couldn’t for your own interests.
Title search, inspections and surveys.
The costs linked to mortgage refinancing and loan modifications are rather large. One should expect to pay anything between 3 to 6 percent of the outstanding principal in setup fees. This will include the survey of a qualified inspector that will determine if your home is still sound and therefore a good investment.

Title surveys, check the accuracy and availability of the titles attached to a home or property. Some banks will also ask for insect infestations and other smaller issues before agreeing to the loan.

These are just a small sample of the fees you will have to face. It is important that we compare our income, the c of loan modification and the savings the loan mod will provide.  Do yourself a favor and check the real cost before signing.

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Sometimes the things that scare us the most are the subjects we know less about, death, darkness, losing someone we love and foreclosure are just a few examples. There is a reason we know little about the things we fear, not knowing is often worse; we always imagine things are worse than they really are. Learning about our fears and finding ways to deal with them is the best policy. This article will aim to shed some light on the issue of foreclosures and what they really are, that way we will hopefully fear them less and learn how to avoid them.

Foreclosure is a legal term to describe the termination of a mortgage or loan. Foreclosure occurs when the mortgagee (the lender) gets a court order that terminates the mortgage and allows the mortgagee or lender to redeem the mortgage’s security, nearly always the home itself. This occurs when the borrower fails to pay the mortgage principal and interest payments; the lender has then the right to force the borrower to either pay the payments he is behind in plus costs or sell the house or some other asset to meet his responsibility of paying the mortgage. When the borrower sells the property and uses the proceeding to pay the lender it is said that he has foreclosed the mortgage.

This rather dry definition we worked through provides some interesting points.

1) A foreclosure is a legal process that must be approved by the courts of equity. 2) Losing the house is not the only way to deal with the situation. The government is trying its best to avoid foreclosures and is willing to help most people that are willing to work hard to find a way around a foreclosure through loan modification and other types of financial aid. Do your homework and make it your job to jump through the necessary hoops to save our home.

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We live in a dog eat dog world that works for the loans, mortgages and DVD rental companies when you are late in returning a DVD, there is no mercy, you have to look after yourself and know what you are doing or get ready to lose some serious money. Finding a good deal in a competitive and complicated market like the credit industry is no easy task, fortunately it is not impossible and you don’t have to be a MENSA member to find a good loan modification for your mortgage or loan. You do however have to understand the basics of mortgages, loans and their respective modifications.
It is useful to view mortgages as the most basic investment a bank can make, that is an investment in you. They give you cash and get a steady return on their investment in the form of interest payments while they get their initial capital back with your principal payments. The rate of interest will depend on the going rate when you contracted the loan, how good your credit record was, how savvy you were when negotiating the loan conditions or a combination of all three of those factors.
Depending on the world economy, the going interest rate set by governments and a number of other factors banks are willing to lend at a lower or higher interest rate. If you can find a bank (it can be the same lender you are using now, or another one) that will lend you money at a cheaper interest rate you might be able to modify your mortgage to a lower interest rate. Similarly if you are struggling to make your mortgage payments you might be able to find a lender that will lend you the same amount but allow you a longer period of time to pay back, this will have the effect of lowering your monthly payments while increasing how much interest you pay on your mortgage. You can also modify your loan to increase the amount of cash you borrow or you could decide on any combination of all three options, lower interest, longer tenure and larger loan.
The key to find a good deal on your loan is to first check how expensive modifying your loan will be. To find this out you will need to know all the fees and costs your current lender is planning to charge you (a.k.a prepayment penalty fee) for paying early and depriving them of the interest you promised to pay and the fees your new lender will require to process the new loan with the modification you want. If you use a middleman business to process your application you will have to pay for their fee also. We don’t necessarily recommend this as most people can handle the paperwork themselves and the application businesses can’t do anything for your mortgage that you can’t do yourself.
Once you know the cost of a loan modification you need to know how much you are going to save with the loan modification. Savings can come in the form of lower interest rates or a shorter tenure. If you pay lower interest rates your overall interest payments for the mortgage can drop considerably and pay off your loan modification expenses in a matter of one or two years reaping substantial savings.
Of course the reason you want to modify your loan maybe not so much to save money but to make your payments affordable and this might involve lengthening your mortgage which will make your mortgage more expensive but at least you won’t lose your home.
It is as simple as that, compare the cost (real cost) of the loan mod and compare it to your savings, if there is a substantial saving you have found yourself a good deal.

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