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Loan Modifications do seem to have finally got moving. Trial loan modifications are heading towards their first million, there has been over a 100,000 completed loan modifications and even Bank of America, the sleeping giant of loan modifications has hit the 200,000 trial modifications line.

However, what is not clear is if loan modifications are actually a good thing for homeowners. Reports published in this website have shown that loan modifications may be pushing homeowners deeper underwater instead of lending them a helping hand, pun intended.

This is because many banks are simply cashing in the Government’s incentives while capitalizing the late payments and interest charges onto the loan modification without reducing interest rates or extending the loan term, reducing the principal balance of the loan is, of course, very rarely even mentioned.

So is it worth going for a loan modification? It depends on:

1)      How good a deal you can get on your loan modification.

2)      How underwater your home is and

3)      How much you care about your home

Let’s analyze these three questions to see if loan modifications are worth it in your particular scenario.

1)      You are getting a good deal on your loan modification if the lender reduces your interest rates and your monthly payments are significantly cheaper. Unfortunately, in the recent past banks have got away with providing loan modifications that simply put borrowers further into debt. However, Government guidelines effective from the 23^rd of November 2009 clearly state that loan modifications under the HAMP program, which provides incentives to lenders, must reduce the interest rate to the current market rate.

This is the pertinent paragraph in the Mortgagee letter 2009-35 from the Government to all approved mortgage providers:

The Mortgagee shall reduce the loan modification note rate to the current Market Rate.  For purposes of this requirement, the Department shall consider Market Rate to be no more than 50 basis points greater than the most recent Freddie Mac Weekly Primary Mortgage Market Survey Rate for 30-year fixed-rate conforming mortgages (US average), rounded to the nearest one-eighth of one percent (0.125%), as of the date the Modification Agreement is executed.

What does this mean in practice?

The next paragraph in Mortgage letter 2009-35 gives the answer with an example (italics and underlining are ours):

The Mortgagee approves a Loan Modification that is executed by the borrower 35 days after the date of this Mortgagee Letter.  The current note rate is 7 percent and the most recent Freddie Mac Weekly Primary Mortgage Market Survey Rate for 30-year fixed rate conforming mortgages (US average) as of the Modification date is 5.04 percent.  To be eligible for payment of a mortgagee incentive and costs for a title search and/or recording fees on the Loan Modification, the fixed note rate on the modified loan may not exceed 5.50 percent (The Freddie Mac US average rate of 5.04 percent rounded to the nearest eight of a percent plus 50 basis points).

If your mortgage provider reduces your interest rate by nearly 1.5% you are likely and extends the mortgage for 30 years you are likely to see a very significant reduction in your monthly payments. However, don’t forget to check what the term extension will translate to in extra interest and make sure you can live with it.

2)      If your mortgage is so underwater there are little chances it will ever be worth what you bought it for and you just started paying for it, you need to decide if it is even worth trying to save it. Walking away, taking the hit on your credit and starting fresh might be the best option for you.

3)      Of course this depends how much you have emotionally invested in your home. If you can’t find another home in the area and you don’t want to change your children’s school, or you need to live near your parents the financial value of your home might only be one of the factors you have to consider.

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1. HAMP Loan Modifications and “In-house” Modifications, What Is The Difference?
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1. HAMP Loan Modifications and “In-house” Modifications, What Is The Difference?
2. Are Loan Modifications Worth your time
3. Loan Modifications, Loss Mitigation Incentives and Other Greedy Games

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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Picking Commercial Loan Modification Companies is a little bit like choosing a watermelon; it is not easy to know if it’s going to be a good one until you crack it open.

Unfortunately the economic recession has forced many businesses, large and small, into bankruptcy and this has left many apartments, houses and offices vacant. Property values have also dropped and many commercial real estate owners have seen their property drop from 30% to 50% depending on their postcode. The drop in value has been caused by the lack of demand and the difficulty in finding financing for commercial real estate. Loans of 85% the value of a commercial property were the norm a few years ago, now 60% is the new standard.

It is no surprise that Commercial Property owners are in trouble. The typical apartment building owner, for instance, has seen his occupancy levels drop by over 30% and can’t expect to refinance his property without resorting to hard money loans with their exorbitant interest rates of 10 to 20 percent, which for most business is just not a realistic option.

This situation makes loan modifications the most viable option for many commercial property owners. Loan modifications, through a reduction of interest rates, extension of loan term or in rare cases lowering of the loan principal, offer a chance of staying in business for many troubled commercial estate owners.

However commercial loan modifications do tend to be even more complicated than personal home loan modifications making many choose a loan modification company to help them through the process.

Using a professional to help you through the negotiations of a commercial loan modification can be a good idea. Depending on your experience and your background it could also be a good idea to do it yourself. However if you do choose to hire a commercial loan modification company there are a few things you need to keep in mind.

1)      Commercial Loan Modification is an unregulated industry and doesn’t require any type of license or qualification. This means that anybody can put up a sign and call himself or herself a commercial loan modification expert. This puts all the onus on the client, you, to check you are dealing with a real pro.

2)      Does the company have lawyers on their staff? This is not a guarantee of professionalism but better companies do tend to have their own lawyers on staff.

3)      Ask for references from other clients that have received successful commercial loan modifications.

4)      Check out the owners of the company’s background. What is their history?

5)      Who will be managing your loan modification? Do they have experience? A loan modification could save or sink your business. Credit scores can be seriously damaged and long relationships with banks severed. Make sure you are dealing with an experienced agent. Experience is the best recommendation but you can also ask for any other relevant qualifications like a Certified Commercial Investment Manager (CCIM) when assessing your loan modification agent.

These measures will not guarantee your loan modification success but it will increase your chances of a successful  commercial loan modification.

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A balloon mortgage is one in which monthly payments are made for a pre-determined period of time, with the balance of the loan paid in full at the end of the loan term. Like an ARM, interest rates on a balloon mortgage are typically lower than on a fixed rate mortgage and this makes the monthly payments on a this type of mortgage are very low and affordable. Balloon mortgage loans are calculated to amortize over a longer period than the due date of the balloon. A balloon, or lump sum, payment is required at the maturity of the loan to completely pay off the remaining principal. Therefore its important to keep in mind that the terms on a balloon mortgage are insufficient to completely amortize the loan.

Balloon mortgages can, and often do, contain a contractual opportunity to refinance at prevailing rates when the balloon payment is due. If the balloon mortgage loan has the option to be refinanced when the initial period expires, it will be called a convertible balloon mortgage. Some balloon mortgages come with “reset” clauses that provide for the original lender to reset the loan terms so that the loan is fully paid off in the remaining twenty three to twenty five years. The advantage of a balloon loan with a reset is that the loan payment will remain constant for the remaining life of the mortgage. The disadvantage is that the borrower is subject to the then current rates. If you are unable to convert or refinance the balloon mortgage, you may be forced to sell your home to make the loan whole. However, for the initial period of the loan, the interest rates on a balloon mortgage are usually a little lower than a comparable Adjustable Rate Mortgage.

Alternatively, with a fixed-rate mortgage you’ll have the benefit of knowing exactly what your monthly payments will be for the entire term of the loan. Because few people have the funds to fully pay off the balance due at the end of the balloon term, when using a balloon mortgage as the instrument of financing, the borrower should be concerned about future interest rates because they will be subject to them when the loan matures. However, most people that take out balloon mortgages assume that they’ll be moving within the term of the balloon period or that they will be eligible for a more attractive loan at the end of that period. Many people also use balloon mortgages to get that larger dream house. This strategy can, in fact, be fairly risky and a borrower should consider the market risk against the benefit of a larger home. Again, at the end of that period, the borrower must pay off the loan in full – this is the “balloon” payment. For example, a 7 year balloon calculated to amortize over 30 years will have low payments for 7 years and then the remaining balance will be due.

Before borrowing it’s important to consider whether you already have too much debt, whether you will be able to service the debt if you refinance at the end of the balloon period (or pay the balance), the risks associated with the current real estate market, and other factors as well. While it can be fairly easy to make the monthly payments on a balloon mortgage, it is very important to consider that there could be difficulty in managing the terms of the loan once it matures. In the current climate, fixed-rate mortgages are definitely the “loan of choice” for homeowners seeking a refinance mortgage, but if all the factors are considered and risks weighed, a balloon mortgage can be a viable alternative. Loan programs vary depending on the borrower’s credit, closing costs vary from state to state, work with your loan officer to get a proper estimate when you apply for your loan.