Secrets from the Trenches:
A Two-Pronged Loan Modification Analysis
A loan modification can be a ray of sunshine on a cloudy day for many homeowners facing foreclosure; especially when this year’s statistics show that homeowners are increasingly receiving loan modifications from their respective lenders. Although this is great news, it’s not much help unless you know how to make the loan modification work in your favor. Remember, banks are friends of fair weather that lend you an umbrella in fair weather and ask for it back when it begins to rain. Having a front row seat to the foreclosure crisis has proven that loan modifications, if not tailored to the homeowner’s particular financial constraints, can only help postpone the inevitable, a trip back into the trenches. Let’s face it; during a loan modification, the bank’s job is to conjure up an arrangement that gets the bank the most money possible while keeping you in your home. Usually the banks will tweak the interest rate until the monthly payment under the loan modification becomes affordable. Needless to say, don’t jump into a deal you can’t afford out of desperation! The best way to approach a loan modification is to use a two-pronged approach.
When homes are so far under water, a loan modification becomes nothing more than renting that same home at a higher price for the next 10-15 years. However, keep in mind that as a homeowner, you will also be paying for homeowners’ association fees, taxes, and insurance on your home. As such, you have to ask yourself: Is this a good deal? Are the monthly payments under this loan modification less than the monthly rent I would pay to rent the exact same home across the street or one substantially similar to mine? If the answer is a resounding “no,” it’s time to continue negotiating.
Whether the bank reduces part of the principal on your loan or offers a reduction in the interest rate in modifying the loan, make sure you’re getting a good deal by today’s standards. This means that if you were shopping for a new home today and you were offered the same terms as the loan modification on the same or a similar home, you’d jump at the deal. Ask yourself: Is the new interest rate under the loan modification a competitive interest rate in today’s market? Is the reduction in the principal balance such that it would constitute a solid investment today? Again, if the answer is “no,” continue working out an affordable loan modification or consider other options, such as calling us for our advice.
In The Trenches – South Florida Law Blog