Reasons To Consider Doing a Home Loan Modification
Home loan modifications are a tricky business. On one hand, they can work out in your favor, especially in emergencies or when you have the ability to pay more each month and cut down on the lifespan of the loan. On the other hand, they can royally bugger your finances if you’re not careful, and some modifications can come with nasty twists later on down the line.
So it’s not only crucial to understand what modifying your loan means in practice – both in the short term and over the long run – but it’s equally important to be honest with yourself as to why you want to modify your loan. Are you changing careers and need a lower mortgage payment for a few years, or do you want to be able to finance a boat? Not that one is better than the other, but you need to assess why you want to refinance and then determine whether or not it makes sense.
It’s important to remember that any modification comes with trade-off: it will either save you money in the short term and cost more over the long run, or ramp up your monthly payments while cutting the actual cost of the loan over the course of its term. You need to know which is which and why it works that way, and be reasonably assured of your means when considering modifying your loan.
If you’re having trouble paying your mortgage, it’s better to modify than allow a short sale or foreclosure.
People find themselves having trouble with their mortgage payments for a variety of reasons, but they all have the same implication: you could lose your home! Maybe you’re in the middle of a career change, or maybe a family member is seriously ill and you’re down one income while you or your spouse cares for them. It happens.
Whatever the reason is, as soon as you find yourself in trouble, go talk to your lender right away. They’ll be more willing to work with you if you don’t wait until you miss a payment. You also need to make sure you’re in good standing with them and have reasonably good credit, because this increases your chances of successfully making your case and modifying your loan. Most lenders are, if not sympathetic to your circumstances, at least not excited about a possible short sale or foreclosure, which means more work for them and less return on their investment.
This can work to your advantage, but you need to not wait until you’ve missed a payment.
If you’re going to be in the home for a while, modify rate by extending your loan and refinancing.
If you think you’re going to be around a while, you can modify your rate and monthly payments by extending the lifespan of your loan. While this will save you money each month, over the course of the loan you’ll likely be paying thousands more than you would have if you’d paid over a shorter term.
This may be an acceptable trade-off, though. It’s not a good feeling to know that you’re going to pay an extra $7,000 over the next twenty years, but it’s probably a better feeling than knowing you’re about to lose your home and all the money you’ve put into it so far.
For shorter term, go with an ARM, which will have a lower rate initially but will eventually rise.
We’ve talked before about how adjustable-rate mortgages, or ARMs, aren’t really ideal in any situation except for a select few. They’re not always bad, of course; it just depends on your situation.
An ARM, as the name implies, comes with an interest rate that fluctuates and affects the amount you owe each month. Typically, the first few years attach a lower interest rate which keeps your monthly payment low. Afterwards, the interest rate increases and so do your payments.
If you need a lower mortgage payment for a few years and are willing to shoulder the higher payments later on, this is ideal, especially if you’re dealing with a temporary income cut or a career change. It’s not ideal if you straight-up can’t afford your mortgage payments one way or another and are hoping for things to turn around in a year or two.
As an aside, if your turnaround takes longer than expected, you can refinance your ARM as rates are about to increase to buy yourself some time.
You can shorten loan terms to pay less in total on your mortgage.
Let’s say you don’t have extenuating circumstances. Let’s say you now have the ability to shoulder a higher payment each month. If you’re confident in your financial management, then you can always shorten your loan term to save more in the long run. Again, the trade-off is that you’ll pay more each month, but you’ll pay off your house sooner and pay less in total while doing so.
If that’s the case, then you can shorten your mortgage to, say, fifteen years instead of thirty. It’s a hefty change in your monthly payments, but you can rest assured that you’re saving on the total cost of you loan, and you can’t put a price on that.
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– Get It Right Solutions LLC