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Should I do a loan modification?

March 11, 2008

moneyLenders have become much more willing to modify the terms of mortgages recently. But is a loan modification going to solve your financial problems in the long term? Probably not. While lowering your monthly payment is appealing (at first glace) it is not enough to address the fact that your home is no longer worth what it was a few years ago. So your bank is willing to knock your interest down from 7.85% to 5.85%. Good. But what about the $85,000 in equity that has evaporated into thin air? Are they going to lower your principle balance? This is the big question and the one you should be asking.

If your lender will lower your interest rate without charging you a fee then you have no reason not to jump on that opportunity. Do the loan modification immediately. But don’t assume that a lower interest rate is a magical solution to your mortgage crisis. It is only one piece of the pie. The real solution is a principle reduction.

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One Response to “Should I do a loan modification?”

  1. Ted G. L on March 17th, 2009 8:44 am

    This is a great point. If you have lost 50% equity in your home shaving a few percentage points off your interest rate is like putting a Band aid on a broken leg.

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