Evaluate Your Loan Modification Offer

by admin on February 21, 2009

When you decide you want to go for a loan modification from your lender, be prepared to spend a lot of time on the process. There will be a lot of paper work involved, so take very thorough notes. It would be a good idea to create journal of everything that goes on between you and your lender and even your lawyer if you have hired one.

If you are finally successful in getting your lender to offer you a loan modification, read the terms of the offer very carefully. Many people are getting initial offers from their bank that are not much different from their original loan and therefore not really helpful. Here is an example:

Original Loan Terms
10.25% interest
Current Payment: $3,225.00
Current Loan Amount: $525,000

Modified LoanTerms
6.75% interest
Escalating interest rate from years 5-8 Capping at 9%
Interest Only for the First 7 Years
Loan Modification Fees: $15,000
Revised Loan Amount: $540,000

At first glance you may say to yourself, this loan modification offer is great, I get a drastically reduced interest rate from 10.25% to 6.75%. This reduction in interest rate will surely reduce your monthly payment and get you out of a temporary bind, but remember you are only paying interest your first 7 years. Also don’t forget that the rate will escalate over the 7 years and then be right back up to 9%! That won’t be much of a savings for you over the entire duration of the loan. You also need to consider that after the loan resets, you will need to start making principal payments and that will hike your payments up very high after 7 years.

In addition, your lender has tacked on fees of $15,000 to your loan. This is a lot of money and you will be paying this all back over time. If this was your first offer from your bank you should strongly consider rejecting it and asking for better terms. You don’t have to blindly accept the first loan modification offer that comes your way. If you are working with a lawyer or going it alone yourself, communicate clearly and tell the bank that you are looking for something more given your particular situation.

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