When homeowners are facing financial hardship, one of the first options they turn to is a loan modification, since having their mortgage payment reduced to an amount they can afford can make all the difference and help them get back on their feet.
This is a great option for the homeowner, who has a high interest rate, which can be adjusted to a lower rate over the period of the loan, or if the situation is only temporary, such as a loss of a job or unexpected expense. Even a temporary loan modification can help the homeowner stay in the home with affordable payments until things turn around.
Unfortunately, getting approved for a loan modification is not that easy, and the success rates are very low, especially for a permanent modification.
I get a lot of calls from homeowners who are upside down, and unsure if they should do a loan modification or a short sale. It all depends on their individual situation. One of the first things to look at is if they can make the modified payment long enough for their home to regain enough value to sell for a price, which will cover the mortgage and closing costs.
The national economists agree home prices only will increase by a total cumulative gain of 3.8 percent over the next five years. Many homeowners are 20 percent, 30 percent and 50 percent or more upside down. Let’s take an optimistic view, and say prices will increase at 3 percent a year.
For example, a homeowner has a current mortgage balance of $400,000 at 5 percent interest rate on a 30-year mortgage. The home is now worth $250,000 (37.5 percent upside down). It will be 12 years before the home is valued high enough to sell it, pay off the mortgage and all the fees, and walk away with nothing.
If a homeowner is looking at doing a loan modification, hoping the market will turn around in a few years, allowing them to then sell the house and get out from under it, they really need to do the calculations to determine exactly how many years it will take. It is all depends on how upside down they are.
Some banks won’t even start the loan modification process until the homeowner is behind on the mortgage. So, the homeowner stops making payments per the bank’s instructions, only to be denied the modification. Now, they are months behind on their mortgage payments, have accrued late fees, and are unable to catch up. So, the bank starts the foreclosure process. This has happened to several of my clients, and I have written a full article about it, which is posted on my Web site.
For more information on loan modifications and short sales, or for a free confidential consultation, contact me directly, or visit my Web site at www.ArizonaShortSaleToday.com. You also can call my cell at (602) 571-6799, or send an e-mail to Lorraine@ArizonaShortSaleToday.com.