Loan Modification

There are a lot of variables to consider before you make a loan modification. A short list includes the term of the mortgage, the variability of the interest rate and the presence of points. Let’s see how each affects a mortgage loan modification.

The term of the mortgage refers to the length of time it takes to pay off the loan. Most original mortgages are 30 years in length (term.) A loan modification is often shorter though. If you have 18 years remaining on your original mortgage and your interest rate is 7.5%, it may be possible to lower your rate to 5.5% and shorten the term of your loan. It’s possible that your loan modification would result in a 15 year loan, at a lower interest rate and payments equal to or less than you were paying previously. That certainly would be nice to cut 3 years off the term of the mortgage wouldn’t it?

Interest rates are the most impactful factor of all when researching a mortgage loan modification. The example above illustrates how lower interest rates can affect not just the amount of your payment, but the term of your loan as well. Interest rates themselves can also be variable. The most common mortgages have a “fixed” rate. This means that the interest rate stays the same for the entire length of the loan.

Variable interest rates loans work like this. For a term of between one and five years your interest rate is unusually low. To illustrate, let’s say the market rate mortgage rate is 5%. Your variable loan may start at 3.5% for the one to five years. After the initial term, the rate would increase to above market rate; say 6%. Now before you think that you would re-finance this loan before the increased rate kicks in, you should be aware that most of these loans carry heavy penalties for early payoff. Make sure you read the fine print.

So why do people choose this type of mortgage loan modification? In many cases, they have some other debt, such as credit cards, that they plan on paying off prior to the jump in interest rate. This program isn’t for everyone, so make sure to do your research.

The final factor is the presence, or lack of, points. Points are up front charges that financial institutions charge to cover loan processing costs. One point is equal to one percent of the loan. Some home loan modification programs have “0 points.” This means there is no additional loan charge. These programs generally have a slightly higher interest rate. Your up-front costs are lower, but you may pay more over the term of the loan. Some loans have 2 or 3 points. That’s $2,000 or $3,000 extra you pay up front, but your loan rate will be lower, thus resulting in lower monthly payments.

Take your time to choose the best loan modification program for you.