Mortgage modification is one possibility if you find yourself falling behind on mortgage payments. The government authorized these modifications, even agreeing to help subsidize them if lenders agreed. Before you decide on a mortgage modification, you need to understand the pros and cons associated with the process:
Advantages to Mortgage Modification
The main advantage to a mortgage modification is that it can provide a way for you to make payments on your home mortgage loan. Some of the forms a mortgage modification can take include:
- Lower, fixed interest rate.
- Longer loan term, allowing you to make smaller payments over a longer period of time.
- Balance adjustment, resulting in a lower principal.
In some cases, there might be a combination of efforts to help you pay your loan. You should realize, though, that you will be required to show proof of income, and you might have to enter a “trial” period. If you can’t make the payments during the trial period, you might be foreclosed on anyway.
Downside to Mortgage Modification
Before you decide to go for a mortgage modification, you should understand the implications of your action. A lower, fixed interest rate can be a great solution, since it might make your payments more affordable while saving you money over the life of the loan. However, the other solutions might not be so favorable in the long run.
A longer loan term, with lower payments, will mean that you actually end up paying more in the long run. You will pay longer, and you will pay interest for longer — even if the interest rate is changed from a variable rate to a fixed rate. If you are mainly interested in saving your home from foreclosure, and you are ok with paying more in the long run, this might still be an acceptable outcome.
Another consideration is extra taxes. If your loan modification includes some measure of loan forgiveness, that money will be considered income. So, if you had a principal of $180,000, and your mortgage lender modified your loan so that you owed $165,000 instead, you might have to pay income taxes on the $15,000 difference. Check with a tax professional to make sure.
Finally, there have been some instances in which a loan modifications have actually damaged credit scores. If you are worried about your credit score, be aware that damage could be done – although the damage is likely to be less than if you experienced a foreclosure.
Before you take the plunge, make sure that you have exhausted other options, and that a mortgage modification is right for you.
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