What You Can Realistically Expect From a Loan Modification
Loan modifications rarely result in both principal and interest rate reductions. In reality, a bank will lower the amount of the monthly mortgage payment by either reducing the interest rate, increasing the principal, increasing the length of the loan term, requiring a large balloon payment at the end of the loan term, or any combination of the four.
Remember, the bank is not your friend. The bank does not modify your loan from the kindness of its heart. (If you haven’t figured it out already, the bank does not have a heart!) The bank modifies your loan because it wants to keep taking money from you, even if the payments are in smaller increments. However, in order to reduce its loss, the bank will try and recoup its money in the backend by tacking on extra years to the loan term, increasing the interest rate later in the term, increasing the principal or requiring a large balloon payment at the end of the term. Typically, smaller monthly payments are achieved in the following ways:
- Reduction in interest rate for a set number of years, after which the original interest rate is reinstated + increase in principal
- Reduction in interest rate for the life of the loan + increase in principal
- Reduction in interest rate + large balloon payment at the end of loan term
- Extending the life of the loan
A loan modification is a financial decision for both the bank and the borrower. If you are among the many that are unable to get both a reduction in principal and interest rate, you will most likely be faced with the decision of whether to commit yourself to paying more in the future in order to pay less now. The trade-off may be worth it for those whose financial troubles are relatively temporary or those who believe their home value will increase in the future so that the home can be sold or the loan refinanced prior to the increase in monthly payment. If you are interested in discussing your loan modification options, please contact us at info@llkattorneys.com.