If you watch the news you probably know that there have been a lot of foreclosures in recent years. As a result, Congress has pushed mortgage lenders to offer loan modifications to help people save their homes. A loan modification can be a good tool for changing the terms of a mortgage so that the homeowner can afford to keep their house and cure the arrears. However, it is not always the best option.
Loan modifications take the mortgage arrears and put them back into the mortgage. They also re-amortize the loan over 360 months or 30 years. What this means is if you were in month twenty of a thirty year mortgage, and then modify the loan, you are essentially starting over in your mortgage. Sometimes this results in lower payments, but sometimes it doesn’t. Additionally, if you take a look at the amortization schedules in the first loan and compare them to the schedules in the modified loan you will probably find that under the new loan a much smaller portion of your payment is going to principal than in the first loan. If you don’t intend to stay in the home long-term, the modified loan may be a bad financial decision because it may reduce the amount of money which would have been applied to the principal, which in turn reduces the proceeds you would have gotten from the sale of the home.
Chapter 13 bankruptcy is another way to protect a home from foreclosure and cure mortgage arrears. In a Chapter 13 bankruptcy case you pay your mortgage arrears as part of a repayment plan. Mortgage arrears are repaid at no interest in north Texas bankruptcy cases, and at the end of the plan the mortgage loan is caught up without starting over in the mortgage. The downside in a Chapter 13 case is that the debtor is required to make their regularly scheduled mortgage payments each month as well as a payment to a trustee to cure the arrears. If the debtor has enough income to support these two payments they will usually be much better off in the long run than if they filed a loan modification.
Loan modifications do have their place though. If the debtor has a high interest rate on their mortgage and the modified loan will reduce the interest rate as well as cure the arrears, then a loan modification may be a better choice than a Chapter 13 bankruptcy. If you are considering a loan modification ask for a copy of the amortization tables and an estimate of what the loan will cost you over the entire thirty years. Weigh this information against your existing loan’s terms and also consider whether you intend to stay in the house long-term or if you are planning to move at some point in the not-so-distant future. If you need help analyzing your situation, speak with a bankruptcy attorney, accountant, or a friend with experience with these types of financial matters.