Short Term Loan Modifications Aren’t The Answer

by chadfish on December 9, 2009

If you go to your lender or bank and ask for a loan modification, you first need to meet certain criteria. Typically you need to be behind on your mortgage payments before they will even talk to you. The banks reasoning is that if you continue to pay you must not need a loan mortgage, whether or not that is sound logic is definitely debatable.

If you meet the criteria for a loan mod, the bank may offer you a short term solution. These short term loan modifications may only last 3 or 5 years and are designed to give you some breathing room so you can get your financial situation back in order and then resume paying the original terms of the mortgage. Your lender may cut your interest rate from 8% to 5% for 5 years which would help you save some money on your monthly payments.

As a borrower, you need to determine if this short term loan mod is really the right answer for you. In many situations it isn’t as you run some serious risks just qualifying for a loan modification. For example, if you choose to get behind on your monthly mortgage payments then you seriously run the risk of damaging your credit. Your credit score will take a hit and you still haven’t guaranteed that you will get the modification in the end.

You also need to calculate how much an interest rate cut will end up saving you over 3 or 5 years. Is $5,000 in savings worth 200 points on your credit score? For some people the answer might be yes, but not for everyone. At some point you will need to get things in order so you can make the full original payment so in essence you are only delaying the inevitable.

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