Loan Modification or FHA Refinance?

Hello Paul,

I have a house, which is valued at about $380,000 at the moment but I am caught in the upside position like most people owing the bank $475,000 in mortgage (single mortgage.) Two years ago my house was appraised for $600.000 to say the least. Faced with an ARM rate that is scheduled to reset higher by the end of this year, I took the initiative to contact the bank explaining my situation and that if they don’t modify my loan I will not be able to keep making my payment with a higher rate and with no option for refinancing my home since I owe more than the house is worth.

To make the story short they declined my letter but amazingly after the housing bill of 2008 was passed. I got an offer to modify my loan. The offer seems good to me had this housing bill not been out yet. The offer had lowered my monthly PMT and my rate to 3% (40 years amortization) for the first year while increasing further every year thereafter till the fifth year where my rate will stay fixed at 5.9% till the maturity date of my old contract.

I have to accept their offer within a week and need to pay them some loan modification fees of about $750. My loan principle will increase by almost $4000 for some fees and interest that they mentioned.

Now I am in a dilemma of accepting this offer, which most likely will not affect my credit history or forgo the offer for a better government backed FHA loan at 90% of my house value if the bank agrees to it!!! I believe the last solution may involve a negative credit history statement such as settled for less than full. What would you do if you were in my place?

Thanks a lot

Al

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Hello Al,

First, I would circumspectly approach any offer that says send $750 and answer right away.  Having written that, if you can be sure it is your servicing lender that has offered the modification then it sounds like it could be a great mod. 

Keep in mind – and as you already mentioned – the 90% FHA LTV refinance under the October 2008 program Hope For Homeowners is a voluntary program.  The lender does not have to participate in a short refinance and might be inclined to counter with a mortgage modification anyway.  Let’s look at some possible numbers. 

The interest rate under the new FHA program may be somewhere around 6.5% with a 1.5% MIP for a total compare rate of around 8% or above.  So, even if the lender agreed to reduce the principal to 90% of $380,000 the payment would be $2,509 or higher.

The loan modification deal that was offered was 3% for the first year and increasing 1% (?) each year after up to 5.9% with a forty year amortization.  The payment would be $1,715 year one, and 1,996 year two, and $2,292 year three, and I’ll make a footnote here that I have more to say about what everyone should be prepared for in 2011; that’s a subject for a future article.

In sum, the payment is lower for the next few years on the loan modification deal that was offered, but the possibility of a short refinance through the FHA Hope For Homeowners program includes a possibility of sharing in some equity if you sold in year two or beyond.  In any regard, I’d be leery of any loan modification offers that require sending in $750 immediately, so proceed with caution.

Thanks for the questions and hope this helps.

Paul