NOT ALL LOAN MODIFICATIONS ARE GOOD
We have been reviewing loan modifications for our clients over the past six years. The first round of loan modifications appeared to be good deals. We saw modifications that lowered interest rates, converted high rate adjustable rate notes to a lower fixed rate, and some even contained principal reductions in the thousands. This really helped some people out.
The most recent round of loan modifications have contained some very bad deals. The loan modifications we are seeing now frequently do not lower the interest rates. While that is not a bad thing, the new loan modifications are also increasing the maturity date of the loans. That CAN be a bad thing. Most debtors have 30 years mortgages on their houses. The current loan modifications generally extend the loan maturity date out to 40 years now. That means adding an extra 10 years onto your note. However, we are seeing some loan modifications that are ADDING an ADDITIONAL 40 years to the note from today. This is a horrible loan modification.
We just reviewed one the other day for a loan already 14 years into repayment. The loan modification did not offer an interest rate reduction even though the debtor had a high rate over 8%. So the only way the mortgage company could lower the current principal and interest payment was to extend the maturity date. But the offer did not just add 10 years to make it a 40 year note. It actually extended the loan an additional 40 years from today! This means that the original loan term would be 14 years PLSU 40 years for a total loan of 54 years! This is outrageous.
As many of you know, because the interest on a mortgage loan is capitalized, the amount you pay after 30 years of repayment is substantially more than the original loan amount. Using the 8% interest rate from above, the total amount paid on a $100,000 30 year mortgage is $264,000. This means $164,000 in interest alone. So can you imagine just how much interest would actually be paid over 54 years?
The bottom line is to READ the loan modification offer. Just because you get one does not mean you should accept the offer. If the mortgage company extends your maturity date to 40 years, make sure that it is only adding the additional 10 years to your ORIGINAL maturity date. Make sure that you understand how much more interest you will pay when another 10 years is added to your note. Go to Bankrate.com to see how much your loan really costs you.
The loan modification offer MAY make you current, but it may also mean paying back a lot more interest. If you do accept a loan modification that extends your maturity date, then make sure in the future, that you are making extra principal payments to reduce the total amount of interest you actually end up paying on the loan.
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