Are mortgage modifications cost effective

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Are mortgage modifications cost effective?

My last blog detailed the costs and fees associated with a home loan or mortgage modification. If you read the article and you had never negotiated a loan mod you were probably amazed at the amount of fees that must generally be paid in order to get a loan modification, if you had it probably just brought back bad memories, sorry.

So is getting a loan modification too expensive to be worth considering? The increasing amount of people that are taking loan modifications would make you think there must be something in it, and that is generally true.

The cost of a loan modification or mortgage modification is generally between 3 to 6 % of the outstanding amount of your mortgage. This means that if you still owe 50,000 dollars on your mortgage you can expect to pay around $2,500 in fees. That is a lot of money, can a loan modification with an interest rate reduction justify the cost? It can, and we will prove that shortly.

However for many people the main point of a mortgage modification is that they don’t lose their home not saving money, however with the current interest rates you can generally do both. Work out how long it will take for you to break even on your loan modification?

Let’s imagine you negotiate a 30 year mortgage at 5% interest on $200,000 and you previously had a 6% interest rate and that your home loan modification fees amounted to $2,500, which would be a pretty good deal. The first thing you would notice is that your monthly mortgage payments would drop by $126 dollars. This saving needs to be put into perspective deducting the cost of tax. Assuming a 27% tax rate you are left with $91 in savings every month. Doesn’t sound that much when you just spend $2,500 in fees, does it?

However you will break even in only 27 months ($2,500 / $91) every payment after will be saving you 91$ every month from your previous mortgage. This example assumes that you have not lengthened (or shortened) the tenure of your loan. If you increase the time you have to pay your loan this increases the interest you pay and will negate some (if not all) your savings.

As you can see calculating the cost and savings of your loan modification is not rocket science and anybody armed with a little algebra can get into the nitty-gritty of a loan mod.