Beware of Today’s Loan Modifications.
There is a new loan modification that some banks are using that could cost homeowners tens of thousands of dollars over their current loan amount.
In the early 2000s, and during the recession years of 2008-2012, when homeowners faced financial hardships they could contact their lender to ask for a loan modification. If the lender agreed, the loan agreement might be either a reduction to the loan amount, (Note: This could result in a large tax bill) or a reduction in the interest rate to reduce the monthly payments.
This was a great way for financial institutions to avoid the expensive and time-consuming process of foreclosure. Foreclosure usually means a loss to the mortgage company. Agreeing to the reduction of these numbers lenders were compensated by the government. This was known as the “Bank Bailout”. Banks are still performing loan modifications, however, you need to read them very carefully. The new loan modifications may reduce your monthly payment but may also add the difference to the end of the loan with a balloon payment. Some loan modifications take the money from the previous loan that you thought was forgiven and add it to the back end of the new loan at the time of sale.
For example, I pulled the modification below from public records and it showed the following:
1. The first loan occurred in 2006 for $293,000.
2. In 2009, the owner was granted a loan modification on the property that reduced the principal balance to $263,000 and an interest rate to 3.125%.
3. In 2017 a 3rd loan modification was allowed on this property. However, the loan balance is now $296,000 with balloon payments of the deferred principal of $51,068 and the additional unpaid principal of $82,405.
Below is the public record of this loan history:
Certainly, loan modifications are sometimes necessary, however, please remember these key items.
1. Read carefully so you know how much you will really pay for the modification.
2. Call the bank to find out if you can refinance instead of modifying your loan.
3. Have an experienced Real Estate Broker do a market evaluation on your home. As shown by this example of the hefty payments, it may have been more advantageous for the owners to sell the home before they enter into a loan modification.
4. If you receive a phone call about a modification, please research all your options.
For more information contact
Lisa A. Schultz AVP/Senior Account Manager 253-241-6317 [email protected]
Chicago Title A Fortune 500 Company