Loan Modifications on Underwater Homes: just delaying the inevitable?

You’ve just spent months trying to get a loan modification on the mortgage for your house, and today you found out you got accepted into their program.

Congratulations!

Or maybe not.

What if your house isn’t worth as much as the loan, even the modified loan? We call that being underwater. Blub. Blub. Blub. No fun.

And don’t kid yourself, underwater houses are just as common in Andover, Methuen, and Windham as they are in Lawrence or Haverhill; its a national problem affecting everyone up and down society’s ladder.

Lots of loan modifications work by putting your arrearsĀ onto the back of the loan, giving you a lower interest rate (sometimes temporarily), and extending the length of the loan, say from 30 years to 40 years. Presto, this will result in lower payments (sometimes temporarily). But it actually makes the amount of principal owed increase, meaning you are deeper underwater than before.

If property values don’t increase rapidly, you are essentially chained to the home, and won’t be able to get away from it without a short sale or foreclosure down the road.

Don’t kid yourself, this is no form of investment. Basically all you have is a place to live in right now, at a price you presumably can afford right now. Which really isn’t very different from filing a bankruptcy case now (which avoids short sales or any deficiencies from foreclosures), and renting for a few years, while watching to see if market conditions improve.

 

By Doug Beaton

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