The moment a homeowner misses a mortgage payment, the risk of a foreclosure action being filed immediately increases. Such an action can be avoided by obtaining a loan modification. Loan modifications restructure a mortgage so as to make monthly payments more affordable for struggling borrowers.
Homeowners who try to get a modification independently are not as successful as those who work with a Miami foreclosure defense attorney, specifically an attorney with extensive expertise in filing for loan modifications.
Such an attorney will know which alternative is best for their clients. Below, we discuss the pros and cons of common types of loan modifications.
Homeowners are able to either postpone their monthly payments or make reduced payments temporarily. Borrowers must pay off their missed payments lump sum or in installments at a later date, which is usually at the end of the forbearance period or when the loan matures.
Pros — This option provides short-term relief from financial hardships that will resolve quickly.
Cons — Homeowners will have to make pay more in interest. If missed payments are added to the end of the loan, it will take a few more months to pay off the debt.
Lender agrees to reduce the total amount of the loan, therefore homeowners will get reduced monthly payments because they owe less on their mortgage.
Pros — This is the most attractive type of loan modification because both monthly payments and the total principal of the loan are reduced.
Cons — Principal reductions are rarely offered by banks and lenders simply because they cannot or do not wish to offer loan forgiveness to their borrowers.
The lender agrees to reduce the interest rate on a mortgage loan, which makes monthly payments more affordable. However, the interest payments that the homeowner did not have to pay during the length of the rate reduction can be added to the loan’s principal to make up for the reduction in the monthly payments.
Pros — Homeowners’ income is taken into account when determining the lowered interest rate. If the reduction is permanent, borrowers will pay lower monthly payments for the full loan term.
Cons — Rate cuts are often temporary and last only a few years. Following the initial reduction, the rate will return to whatever the market rate was at the time the modification was secured.
Lender agrees to extend the term of the loan, usually adding ten more years to the standard 30-year amortization period.
Pros — Greatly improves a mortgage’s affordability by decreasing monthly payments. This is possible since homeowners are given more time to pay off their loans.
Cons — Since the debt is kept for a longer time, borrowers will have to pay more in interest.
An Alternative Option: Repayment Plan
This is not considered a loan modification since the terms of the loan remain the same. Still, repayment plans are what banks and lenders offer most often to delinquent borrowers. Lenders distribute and add missed payments to homeowners’ monthly payments until the loan becomes current again.
Pros — Borrowers get to pay off their missed payments and avoid foreclosure.
Cons — Repayment plans are not a favorable option for homeowners struggling to make monthly payments on their mortgage. Since their debt is redistributed, monthly payments actually increase and the loan is not made more affordable. Consequently, the likelihood of homeowners re-defaulting is high.
If you are experiencing financial hardship and struggling to make your monthly mortgage payments, consult with a Miami foreclosure defense attorney experienced with loan modifications.
At Graham Legal, loan modification is our speciality. Call our office today to find out how we can help you eliminate the risk of foreclosure.