If you have been watching the financial news you will probably have heard about the millions of people that are trying to get a loan modification that will allow their mortgages to be affordable and save their home from foreclosure and how the Government is bending backwards to make that possible. You will have also heard about the great savings that can be made by re-negotiating your loan at a new interest rate. All this can make loan modifications sound like a win-win deal that just can’t go wrong. Unfortunately that is not true. There are plenty of ways of screwing a loan modification or home mortgage refinance, this article will look into a three reasons that could make your loan mod a bad idea.
1) You have had your mortgage for too long. If you have been paying your mortgage for a long period of time it might not be a smart idea. Why is that? Because at the beginning of a mortgage you are mostly paying the interest of the entire mortgage and as the years go buy the percentage of the monthly payment that goes to pay the principal of the loan instead of simply paying the interest. To illustrate, in many loans the first five years of a mortgage up to 85% of the monthly payments are used to pay interest while only the 15% goes towards paying off the principal. If you have paid a mortgage for a long time you have already paid most of the interest and if you renegotiate the loan with a modification you will have to start from the beginning again which will mean paying more interest and earning less equity. The ideal mortgages and loans to modify are relatively new mortgages or home loans that had a relatively high interest rate to the current one.
2) Your prepayment penalty is too high. Banks are clever they don’t want you leaving to the competition the moment interest rates drop so they often build in prepayment penalties in a mortgage. The prepayment penalty also has the effect of generating profit if you decide to pay off the loan early. If you have a high prepayment penalty it could be too expensive for you to modify your loan. The way to go is to ask for a few estimates from different lenders and work out the savings and the cost of paying your mortgage early.
3) You are planning to move soon. Earning savings from your mortgage modification takes time. It can take up to two to three years to break even with a typical loan modification. If you plan to move home soon you will probably be changing home before you have saved the money you spent on fees and prepayment penalties.
by Andrew
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