An adjustable rate mortgage is a term mo….

posted in Mortgage by Admin on August 26th, 2009

An adjustable rate mortgage is a term mortgage for x number of years with interest rate reviews every one to three years.

Student loans are two-edged swords.

Uncomplicated Explanation Of The Loan Modification Process

By Nick Adama

If you are up against foreclosure, or have a house payment that is too high, then you’ve probably thought about getting a loan modification. A loan modification is when the terms of a loan are permanently altered to allow a reduced payment.

The lower payment is delivered by either reducing the interest rate, stretching out the term, or lowering the balance to be more in line with the current market value. In most cases, a combination of several of these methods is used to lower the loan payment. There are other alternative ways to lower a payment with a modification also, but they all revolve around the term of the mortgage, the payoff, and/or the interest rate.

Here is a simple example of how a loan modification can reduce the payment, using each of the three options above.

Method #1 Reducing the interest rate

Lets assume the loan balance is $200,000 and the current interest rate is 7.75% and the payment amount is $1,750. Lets also assume this foreclosure victim has 20 years left on a 30 year note. The victim can no longer afford this payment because of a loss of income. They can afford a $1,250 payment, so the servicer agrees to reduce the interest rate to a fixed rate of 4.25% for the remaining life of the loan. This will give them a payment of $1,240, without the need to re-amortize the term of the loan or lower the payoff amount..

Method #2 Modifying the term of the loan

Lets use the same example above, only this time, we’ll assume the homeowner can afford a $1,500 payment. The loan amount will still be $200K and the interest rate will still be 7.75%. But in this case, the investor was not able to reduce the interest rate. This happens very often, because the investors on the loan are not willing to accept a lower rate. In this case, extending the term of the loan will make the payment affordable again and the investors will keep their 7.75% interest rate. The $200,000 payoff is re-amortized over a 30 year term to get a reduced payment of $1,430. Everyone is happy because the foreclosure was stopped and the new payment is affordable.

Method #3 Reducing the payoff amount

In order for a payoff amount to be reduced, the value of the property must be lower than the payoff amount. In some cases, servicers will lower the payoff amount without this stipulation, but it’s unlikely. To get the payoff amount reduced, you must prove to the bank that foreclosing on the property will cost more than lowering the amount owed to make the loan affordable again.

In this case, we’ll assume the home’s current market value has been determined at $179,000, but the balance is still $200,000. If the servicer forecloses on the property and tried to re-list it, their estimated loses will be 30% of the home’s value. So after foreclosing on the property and re-selling, they will receive around $125,000, if they are lucky. Most banks expect to lose 30%-60% on every foreclosure property, so this estimate is being very generous.

By letting the existing owner to keep the property, with a new affordable payment, they can continue servicing the loan and collect the full value, plus interest. This is a much better option for the lender, assuming the new payment is affordable. By reducing the payoff to $179,000 and keeping the same interest rate and 20 year term, the new payment is $1,470, which now fits into the homeowners $1,500 budget.

Applying All 3 Choices At The Same Time

When working on my personal clients, I generally try to get the lowest possible payment, which would mean lowering the interest rate and payoff, while extending the mortgage to 30 years. By negotiating all of these items, a lowered payment of $880 could be fixed for the life of the loan. An experienced negotiator knows exactly how to get the lowest possible payment in the shortest amount of time.

Negotiating with lenders is all a matter of having the right experience and being prepared. It’s not something most people can achieve without help, regardless of what many people may think. A loan modification is the answer to saving and affording your property. Negotiating your case wrong can not only cost $1000’s but it can cost you your home!

In the previous example, the difference between a good modification and a bad modification adds up to over $100,000 in extra payments over the life of the loan! So even if you are successful with a modification without help, it could still cost you over $100,000! If you don’t understand what you’re doing, or don’t have confidence in your ability to get an agreement, make sure you employ someone to help immediately. There is no time for “on the job training” when a single error could cost you your home!

Nick writes for the ForeclosureFish website and blog, which provide foreclosure help and information to homeowners attempting to save their homes. The site describes numerous methods to avoid foreclosure, including bankruptcy, loan modification, defending a home in court, and many more. Visit the site today to read more about stopping foreclosure while there is still time: http://www.foreclosurefish.com

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