The pandemic has taken a huge economic toll on America. People have lost jobs or had to take lower-paying employment. In some places, housing prices have fallen, leaving owners underwater on loans. When someone has been affected by a bad economic turn, it may be time for them to reevaluate their financial situation. One possibility is a mortgage modification.
What Is a Mortgage Modification?
Put simply, a mortgage modification lowers your monthly mortgage payments. Before attempting a mortgage reduction, do some investigating. A lot of mortgages don’t offer reductions for any reason. Go back through your old contracts to see if a reduction is even possible. If it isn’t, trying to make it happen is a waste of time.
Types of Mortgage Modifications
There are several options for changing your monthly payments, when doing so is possible. It’s important to remember that with many of these options, you’re going to be spending more money in the long run. That may be the best choice if you’re really struggling, but if you can manage to keep up with your current payments, that’s always the best way to go.
Rate Reduction
Your lender may offer a rate reduction, where they charge less interest on the loan. Over time, the interest and payments will go through a “step-up” process, where they get a little higher every few years or so.
Payment Period Extension
It may be possible for your lender to push back the amount of time it takes to pay off a loan. For example, a 30-year loan could become a 35-year loan. Ultimately, the bank is trying to get all of its money back, just in a longer amount of time. This option will definitely mean you’re spending more money overall, as the interest will last longer, too. However, the monthly payments will be smaller and more manageable.
Change the Type of Interest Rate
A lot of home loans are on an Adjustable Interest Rate (ARM), where the lender can alter the interest rate every couple of years. It may be possible to have this converted to a fixed interest rate, where you pay the same percentage of interest no matter what. This could keep the lender from raising the rate, giving you a predictable monthly payment.
Principal Reduction
The principal is the total amount of money you owe on the house without interest. In very extreme situations, situations where the only other option is a foreclosure, the lender may grant you a principal reduction. This option is worth investigating, and it is usually backed by government programs or non-profit organizations. It is a rare occurrence, but there are ways to make a principal reduction happen. Just keep in mind that you’re asking the lender to essentially forgive part of the loan and never expect to recoup that money.
Why Would a Lender Allow a Mortgage Modification?
It’s a simple fact, lenders want their money back. However, they also know when a situation is bad and could get worse. Going into foreclosure is devastating for a homeowner, but it’s also bad for a lender. They end up losing any money they were expecting to get for the home, and they have to go through an expensive legal process for the foreclosure to go through. It may just simply be a better option for them to adjust a mortgage and get what they can rather than go through all that.
Who Qualifies for a Mortgage Modification?
The rules vary from state to state and from loan to loan but, in general, these are the expected requirements for a loan modification.
The homeowner needs to already be behind on their mortgage payments, or they will definitely get behind soon. The owner will need to prove their hardship, showing that their financial situation has dramatically changed and may not be improving soon. This could be a loss of employment; divorce; death of a loved one and loss of their income; natural disaster (including a COVID-19 layoff); injury resulting in disability; etc.
Refinancing
While not technically a mortgage reduction, refinancing is also an option. If you’ve fallen on hard times, you likely won’t qualify. However, when your situation improves, you’ll want to look into refinancing. Mortgage reductions are good for keeping someone afloat when needed, but they ultimately cost more. Refinancing can bring the mortgage back to a place that’s closer to the original deal, saving you money down the road.
If you are struggling to keep up with mortgage payments and want to know more about a mortgage modification, give us a call at (321) 320-6088 or contact us online. Our no-risk consultations are free.