What You Should Expect

Loan modifications can make a lot of sense if everything falls into place but there are some things you need to be aware of when considering a loan modification.

First, you need to determine that your financial situation will improve and at minimum stabilize in order to continue making timely payments. If you default on your loan modification, you won't get another chance with that lender and the foreclosure wave starts yet again.

Second, you need to make sure you don't extend your term yet again when a loan is modified due to the additional interest you'll pay on the new, modified note. Say you bought your house four years ago on a 30 year mortgage with a 6.00 percent interest rate on a $300,000 mortgage. Your monthly mortgage payment is $1,798.

Of that first mortgage payment, $1,500 of that is interest that goes directly to the bank. In the first year, you made total payments of $21,583, with $17,899 of that going towards interest and the remaining $3,684 going to pay down the mortgage.

That's how mortgage loans are calculated, with the bulk of the interest payments made near the beginning of the loan term and little towards the principal. The original principal balance does not get paid down in any significant manner until year 19, when the amounts going to principal finally exceed the amount that goes to interest.

If you modify your mortgage and get a lower rate and your loan term is extended for another 30 years, your bank will have the advantage of still more interest than they otherwise would have received. Banks don't mind a loan modification as long as they think they'll get their money back. In return for making a bet that the homeowner will pay them back on time, a significant amount of interest will accrue for the lender.

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