How do I refinance a modified loan?
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Interesting question:
“I am in the midst of a refi. I am completing a modified loan on my previous mortgage and that ends on 7/14. I wish to refi - paying off present mortgage and a credit line of $16,000 loan plus about 4,000 in cash. New rate will be 5.6$ with another provider. Did not like the former one. I pay my own insurance and prop tax. Anything I should be aware of?”
When you say a “modified loan” I’m going to assume you mean due to a pending default or foreclosure you contacted the lender who agreed to change the loan terms to help you stay in the home.
A little clarification is needed. A true “loan modification” is a permanent change in the loan terms usually in the form of a rate drop, an adjustable rate becoming fixed, or a balance reduction…or some combination.
A “forbearance” on the other hand is a temporary suspension of the loan terms for a designated amount of time. Your scenario sounds more like a forbearance scenario. Forbearance agreements usually involve an interest or payment reduction so the borrower can make a smaller payment with the lender actually tacking the “foregone” amounts to the balance of the loan.
This is important if you attempt to refinance a loan since the payoff amount will have the “foregone” amounts plus interest added to the balance. Now that values are dropping and the loan amount increasing, you could run into trouble seeking a refinance. Not only that, but it would virtually impossible to refinance if you actually received a Notice of Default on the property or if you made a number of late payments in this environment.
If you are in a forbearance situation rather than a loan modification, your best bet is prior to the deadline to negotiate a true modification. Show them you paid as agreed during the forbearance put refinancing is impossible, so a modification is the only option.
This way you can get a permanent set of loan terms you can live with for the long haul.
Good Luck!
If I misunderstood, please clarify in the Comment Box below…and I’ll amend my answer!
2 responses so far ↓
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Irene,
Sounds like a forbearance which means any interest they “lost” by allowing you to pay temporarily at 5.75% would be tacked on to the balance. Contact the lender and ask them if your payment since the change covered all the interest or is the shortfall being added to the balance.
Those pick-a-payment loans were typically built this way in the first place if one was silly enough to make the “minimum payment”. These lenders are really under fire for creating such a deceptive program, so getting permanent modifications to fixed rate loans is not uncommon.
If you don’t mind saying, what was the lender’s motivation for the change when you got ( ie. late payments, notice of default, or just asked) and how long have you had it paying at the 5.75…the whole three years…or some fraction of that.
Lastly, while you’re on the phone with the lender ask them “What is the going rate this will adjust to.” You really need to know that number before 7/14.
Get these answer and comment back. I’ll be able to advise you better with more information.
Thanks,
July 2nd, 2008 at 4:32 pmRKB
My modification was that for a three year period with the same company I changed from a pick a payment to a fixed rate of 5.75 for the three year period which worked much better. That ends this 7/14 and they would automatically go back to whatever rate they are at present.
July 2nd, 2008 at 3:49 pmIrene
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