How Does a Home loan Mortgage Adjustment Work?
The Client Needs the Modification:
Home loan variations for loans used to be a quick way for people to ask for a reduced attention amount without going through a complete refinance. Not all mortgage companies provided loan variations, and those that did provided them for a fee–and usually only to people who had mortgages that hadn't already been packaged and sold to another organization. Home loan variations have become much more common as loan companies try to find creative ways to help struggling property owners in keeping their homes instead of falling into property foreclosure. Modifications used to merely reduced the attention amount, but the newer version provided by some loan companies can switch an adjustable-rate mortgage into a fixed attention amount. Lenders might suggest this as an option to property owners, but more often than not it is the borrower who requests a home loan modification when it becomes obvious that the current loan is not manageable.
The Loan provider Considers the Request:
Home loan companies do not have to automatically accept a ask for for a financial loan modification. Many loan companies have stringent guidelines regarding who can be accepted for an alteration and who cannot, even if the homeowner is living on the street. Keep in mind that these applications were initially developed to help property owners in avoiding the fees associated with refinancing for a reduced attention amount. They were not initially developed to bail out property owners with unmanageable expenses and increasing flexible rates. Every lender sets its own standards for which mortgage loan variations are accepted and which requests are declined.
The Adjustment is Approved or Denied:
After the financial institution makes the choice whether to accept or deny the modification ask for, the borrower is notified of the choice. Borrowers whose requests are declined are told why the ask for was declined, whether it's because the borrower has consistently been delinquent with home or the lender no longer holds the loan or some other reason. If the modification ask for is accepted, the ask for is sent through to the loan servicing department and the loan is modified. Most often, an alteration involves simply lowering the attention amount without changing the amortization of the loan, but different loan companies offer different modification applications. Modifications can take a few payment periods before they go into effect, so it is important that people keep expenses as scheduled.
A 50-year mortgage? Without adjusting for the loss of value in the property? Just…wow. I feel as sick to the stomach as I did when I first heard that auto loans could go to five-or-six-year payback terms on a depreciating asset. And does anyone want to do that math comparing how much ineterst you’d pay on an 11 percent loan for 30 years compared to a 7 percent loan for 50 years, all in the interest (pun intended) of propping up a bank’s balance sheet?
Check my math here, please.
30-yr term @ 11%: You’d pay $685,672.84 for $200,000 over the life of the loan.
50-yr term @ 7%: You’d pay $722,026.15 for $200,000 over the life of the loan The refinance amount here is not including mortgage origination fees and other closing costs often rolled into the loan so that there will be no “up-front” costs. And then there is PMI,at least for a few years, and the taxes.
So the refi, which will at least let you keep your depreciating home, would cost at least $36,352.31 more. Admittedly, this is spread out over 20 years at an average cost of $1817.62 per year, but let’s look at two factors:
1. How old the person would be when the mortgage was paid off. If you take the 50-year refi out when you’re 30 and pay if off when you’re 80? The actuarial odds of you dying before it’s paid are hugely not in the borrower’s favor.
2. Mortgage interest is paid mostly first and mortgage principal is paid mostly last. By the time you are seriously paying off the principal you might be in a nursing home, with no real equity to speak of.
It’s a huge gamble, and yet another way for people who are already in shaky financial shape to take questionable loans from banks who are already in questionable financial shape – and pretend that the house is still worth $200,000. It’s kicking the can down the road, in my opinion. Sure, I’d hate to see a family lose their home. But if it was my family, I’d be leery of such a loan.
With the following assumptions:
- I want to stay in this house.
- The overall cost of renting a similar house is equivalent or more expensive (after including PMI, taxes & maintenance)
Then I would take the 50-yr @ 7%. Ok you essentially rent from the bank (almost interest only). But if your financial conditions improve then you can always accelerate your payments (usually you can do that in the US) and reduce to 30-yrs or even shorter term. You can also always “hope” that the nominal value of your house rise again over the years and build back some equity. And if the price of the house continues to go down then you have nothing to lose since you are already under water.
The alternative is to foreclose (or short sale) your house and then you are left with nothing and probably unable to buy again for many years. What good does it make to you?
The whole point of applying for a loan modification is because the borrower CAN’T make the monthly payments. So why do they take so long to come to a decision, penalizing those who have defaulted on their repayment plan? It would be better for both sides all around if modification applications were approved with more frequency. At least the financiers will see higher pay-back activity if there is a decrease in the amount owed.