Is a Loan Modification Right for Me?

Homeowners struggling to meet their mortgage payments live in fear that the bank will initiate foreclosure and evict them. They sometimes ask for a loan modification to make their payments more affordable so they can remain in their home. However, a loan modification is not always the best alternative.

Avoid Foreclosure because there’s often better options

According to Jorge Ramirez of Realty Warehouse, people should avoid foreclosure but there are often better options than asking the bank for a loan modification. “Foreclosure can have a devastating effect on homeowners and their families,” he said. “After a foreclosure you can have long-term financial problems like levies on your bank accounts and garnished wages. It will be very difficult to qualify for a mortgage and even a car for years to come. With a foreclosure, it is difficult to start over and move on with your life.”

Homeowners can sometimes convince the bank to give them a loan modification, but if they do they can end up in a worse financial situation both short and long term. “When foreclosure is a real threat, people become stressed out, and rightfully so. They will try almost anything to keep their home. I can understand that response, but its always best to be smart and informed. If the bank offers you a bad deal, just say no and rest assured there are other options,” he said.

Jorge Ramirez feels that homeowners have to look at their situation logically, not emotionally. “It just doesn’t make any sense to agree to a loan modification if you are ‘underwater’ and owe significantly more than the house is worth. “Most of the time, the bank is giving you the opportunity to buy back your house for an expensive price that is far more than the house is worth. After making payments on the new loan for 10 years, you still may not have any equity,” he said.

Why Loan Modification is not good alternative

To explain why a loan modification is not a good alternative to foreclosure for most people, Jorge gave the following example. “Say that the market value of your home is now $500,000, but you owe $700,000 on your mortgage including late fees and interest. Even if the bank gives you a lower monthly payment, in the end you will be paying $700,000 for a house that is worth only $500,000. Think about it. You may be better off getting your entire mortgage forgiven by selling your home in a short sale to get a fresh start. Homeowners who sell through a short sale can purchase a home 2 years later and establish a much better financial position both short and long term.”

The pros and cons of a loan modification

Every situation is different, and Jorge interviews his clients to understand their specific circumstances before he gives them advice. When people are under stress, they don’t always make the right decisions. He feels that it is his job to educate his clients and explain their options so they can understand if a loan modification is really in their best interest.

“I don’t want my clients to pay for a house that has become a liability,” he said. “I want them to buy a home at or below market value, own an asset and build up equity in their new home. If a loan modification is in their best interest, then they should take the banks deal. But if not, there are options open to them where they can sell and walk away from their home debt free, start fresh and purchase a new home in due time.”

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This blog is for informational purposes only, subject to change.

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