Evaluating Mortgage Debt

Evaluating Mortgage Debt

Loan Modifications

One of the most desirable options by homeowners is a loan modification. However, there is much to learn about modifications and some homeowners may not benefit to the extent they think. Although loan modifications are designed to lower payments by reducing principals, lowering interest rates or extending the life of the loan, the modification offered isn’t always significant enough to keep a homeowner out of danger. Lender are often hesitant to approve modifications, especially if the homeowner has already missed a payment or the home is worth less than what is owed. Even if a lender does approve a homeowner, the reduction in payment may not be enough to prevent the risk of default and foreclosure in the long run. For homeowners to benefit from a modification, they need to review how each type of outcome could affect their payment and request the greatest reduction.


As the more preferred option by lenders, refinancing a mortgage can lower the monthly payment for homeowners. However, refinancing isn’t for those who have already missed a payment or at risk of default. Why? Because refinancing a mortgage comes with additional closing costs on the new loan, which are often out of pocket expenses. Anyone already suffering from financial trouble is not likely to be able to afford these expenses. Some lenders now offer refinancing without fees or costs, but there is still one issue to consider. When a loan is refinanced it begins a new loan and extends the life of the loan. Therefore, a refinanced 30 year loan will mean that the payments start at year one all over again, losing any progress the homeowner made towards their previous loan duration. While this isn’t necessarily problematic, it should be considered whether extending the loan another 20 or more years is worth the decrease in payments. In general, refinancing should only be considered if it can lower the interest rate by 2 or more points or change the interest rate from a variable to a fixed rate.

Short Sales

Most homeowners would never choose a short sale over pursuing a modification or refinancing, but they have gained popularity in recent years. Although a short sale requires the homeowner to give up the home after the sale, it does produce an immediate relief from liability over the mortgage debt and protects one’s credit from a foreclosure. Homeowners who cannot afford to maintain their mortgage payments or were unable to secure a modification or refinancing option, may find that short sale is an easier way out of their mortgage debt. However, it should be noted that the sale of the home can take months and the homeowner will be liable for payments until the home is sold. A good rule of thumb for a short sale is to enter the process with patience and the understanding that the lender wants the best offer possible.

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