One of the more complicated issues when dealing with a loan modification comes when you have to review and sign the final modification paperwork. In order to determine whether you want to accept the modification or look at alternative options, you will want to understand what you are signing. The lender will send a package of paperwork, usually 10-15 pages long, and most of it is written in legal language. There are a few key items to look for when reviewing a final loan modification.
The first important thing to understand is your loan balance. Most people who go through a modification have been delinquent on payments. The mortgage balance typically reflects the amount of what is past due, added into the loan balance. This is called capitalization of arrears. The lender will take all past due interest, escrow payments and fees and add it to the balance of the mortgage. From there, sometimes a lender will either defer or forgive an amount of the mortgage. They do this after they capitalize the arrears so the deferment, or forgiveness, is not off your original loan balance; instead it is off the new balance including any past due amounts. If there is a principal forgiveness, you never have to pay that amount back to the lender. It will clearly state that an amount is forgiven. Sometimes it is forgiven immediately, others it is forgiven over a period of several years, so long as payments are made on time.
If the lender doesn’t do a principal forgiveness, sometimes they will defer some principal. What this means is there is an amount, which is still owed, but it does not accrue interest and your mortgage payment is calculated as if you did not owe that money. It is essentially a balloon that will be due at the end of the loan term or when you sell the home, whichever comes first.
Once you understand the loan balance, you will want to verify the interest rate. There are usually 3 types of modifications. 1) A modification that does not change your interest rate. These happen sometimes when loans are in a pool of loans that do not allow rate reductions; 2) a fixed rate reduction. The interest rate is set at a fixed number for the life of the loan. This is usually market rate; 3) a step rate modification. This is not a variable interest rate but your rate will change a few times. Generally, the step rate is 2 percent for years 1-5 of the modification; year 6 is 3 percent; years 7-end of your loan will cap out at market rate (at the time you enter into the modification).
Once you understand the balance of your loan and your interest rate, the only thing left is the term of the loan. Most modifications are set at 30 years but some will go as far out as 40 years while others will not change at all.
Once you review all of the terms of your modification, along with the mortgage payment that your lender has offered, you can make an educated decision as to whether it makes financial sense to keep your home.
If you have any questions about your mortgage or if you’re interested in doing a loan modification, contact Cogburn Law Offices today. We can help.