Whether you have fallen behind on your mortgage due to unexpected medical expenses, a reduction in income, temporary unemployment, or just because your interest rate and monthly payments suddenly increased, a Loan Modification may the best solution to your problem.
While most people understand that a Loan Modification can lower their monthly mortgage payment, they are often unaware of how this is accomplished. A knowledgeable loan modification attorney will work with your bank or loan servicer to try and lower your monthly mortgage payment using the following tools:
- Capitalization of Arrears: The first tool used in the loan modification process is Arrear Capitalization. This is just another way of saying that the bank will simply add the interest portion of each payment the borrower has missed back into the principal of the loan for the purpose of the new modified payments. This is tremendously helpful to borrowers who may have fallen behind due to a temporary hardship, as it allows them to get current on their mortgage and resume making monthly payments without having to make a large up-front payment.
- Loan Term Extension: Another tool which is often used to modify a loan is term extension. Banks and loan servicers will usually agree to extend a borrower’s time to pay out to 30 or 40 years. This reduces the monthly payment to a more manageable level, and gives the borrower more time to pay back what they owe. Fortunately, modified mortgages almost never contain a pre-payment penalty, so the borrower gets the benefit of lowering their monthly payment without being forced to pay interest over the next 30 to 40 years if their income improves within that time period.
- Interest Rate Reduction: The next tool used to create affordable modified mortgage payments is interest rate reduction. Under the Federal Home Affordable Modification Program (HAMP), banks and loan servicers generally consider lowering a borrower’s interest rate down to 2, 3, or 4 percent, depending on a variety of case-specific factors, including investor guidelines and whether the borrower lives in the property. Even for borrowers whose mortgages do not qualify for a loan modification under the Federal HAMP program, most servicers will consider modifying a borrower’s interest rate down to the current market rate, which can be hugely beneficial for borrowers with high or adjustable interest rates.
- Waiver of Late-Fees and Penalties: Another helpful tool used to modify mortgages is the waiver of late-fees and penalties owed pursuant to the terms of the original Note and Mortgage. Banks and Servicers often simply waive the payment of such fees where doing so benefits both parties in the long run by enabling the borrower to resume making his or her monthly payments.
- Principal Deferment: Principal deferment is a powerful tool for creating a new, affordable mortgage payment, which is generally used only where the above tools, in combination, are insufficient to do so. Using principal deferment, a portion of the money owed is removed from principal, and the borrower is therefore not responsible for interest payments on this amount for the duration of the loan. This can significantly lower a borrower’s monthly payment. While the borrower is still responsible to repay the amount deferred at the end of the loan’s term, they will most likely be able to refinance their home at that time, as they will have significant equity in their home.
- Principal Forgiveness: Principal forgiveness is the most powerful tool available when creating an affordable modified mortgage payment. However, many investors prohibit banks and servicers from using principal forgiveness, and it is almost never available unless the borrower owes significantly more than the house is worth (the home is “under water”). When it is available, however, Principal Forgiveness generally results in a drastic reduction in a borrower’s monthly mortgage payment. Simply put, this reduction is achieved by permanently wiping away a portion of the borrower’s debt.
At the Radow Law Group, our experienced Long Island Loan Modification Attorneys will determine which tools are applicable to the potential modification of your loan, and we will negotiate with your bank and/or loan servicer in an effort to obtain the most affordable monthly mortgage payment possible. If you are interested in discussing the possibility of modifying your mortgage, call 516-338-7800 today to schedule your free consultation.