A loan modification can be an excellent way to help you during difficult economic times. It can especially help if you’re having trouble making your mortgage payments. However, it is critical to understand that a loan modification is not a panacea for all financial problems. Here are four ways a loan adjustment can assist you in keeping your home during a rough financial patch.
Lower Monthly Payments
If you experience a cut in salary or the loss of one spouse’s job, it can be difficult to make your monthly mortgage payment. Lowering your monthly payments will make it much easier to stay current on your loan and avoid foreclosure. A loan modification can accomplish this in a variety of ways. During times of falling interest rates, the best solution is to lower your loan’s interest rate. Reduced interest rates reduce your monthly payments and make it easier to keep up with your loan payments. For example, if you had a $200,000 loan with a 7% interest rate, your monthly payment would be $1,330. If you could reduce your interest rate to 5%, your monthly payment would be $1,083, saving you $247 per month.
Extend the Term of Your Loan
But even if you can’t lower your interest rate by extending the loan term, you will have more time you have to pay it off, which decreases the amount you have to pay each month. Extending the term of your loan will probably result in paying more over the term of the loan but may help you to keep your house.
Change the Type of Loan
Your interest rate on an adjustable-rate mortgage (ARM) can rise or fall depending on market conditions. This can make it difficult to forecast your monthly payments. If you’re having trouble keeping up with your mortgage payments, a loan modification may be able to convert your ARM to a fixed-rate mortgage. This will provide you with consistent monthly payments that will not adjust to economic conditions.
Forbearance
A forbearance is a contract between you and your lender that prevents you from transiently making loan payments. This can be a good option if you’re facing a temporary financial hardship, such as a job loss or a medical emergency. However, it is important to note that forbearance is not a long-term solution. When the forbearance period expires, you will remain obligated to make up the missed payments, plus interest.
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