Government Mortgage Programs – The Loan Modification – Is it a Good Idea?

Government Mortgage Programs – The Loan Modification – Is it a Good Idea?

The Loan Modification , Is it a good idea?
In recent months with the increase of home owners filing for foreclosure and losing their homes has skyrocketed. It has become apparent, that the need for helping people in a difficult situation is increasing everyday. As a result the government has put together some mortgage programs to combat the ever increasing defaults on home mortgages. One of those programs is the Loan Modification and is offered through your existing lender (the bank or institution who currently owns the mortgage).
The Pros:

The basic idea surrounding the loan modification is that your lender brokers a new loan agreement on behalf of the government. The lender takes the existing loan amount and compares it to your verifiable income. First, the lender lowers the interest rate on the current mortgage to get you mortgage payment within 31% of your monthly income. They can lower the rate down to as low as 2%, to try and get your monthly payment to the 31% mark. Sounds great right, well let me finish. Next if lowering the interest rate is not enough to get to 31% then they begin lowering your principal balance (amount you currently owe) to reach the 31% number. Once this has been accomplished, they lock that in for 5 years and then reevaluate. After five years it adjusts, however only to 31% of your monthly income, so if you make more money you will pay more and so on. So far so good.
The Cons:
Once you have signed up for the Loan Modification you will be required to pay the government 50% of any equity that is acquired on the value of the property. For example, say in 5 years you decide to sale the house and you have $ 80,000 in equity.

You sale the home, and make $ 80,000 the government will take $ 40,000 of that equity at the time of sale. Next say that the loan modification lowered your principal balance by $ 60,000 you have to show that money as income and will have to pay taxes on it. So basically it is a short term gain long term loss. You no longer have control over your home and will be responsible for the amount discounted on your principal.
The loan modification plan is a last resort in our opinion as you lose the very reason you bought a home in the first place, your investment. We feel there are other programs available that are much better, such as the Refinance Plus and the HASP Phase 2 that is available as of April 15th 2009.

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