Why doing a loan mod on your home may be stupid! If someone could provide you with information that would put you in a position to make the best financial decision for your family 2 years, 5 years, and even 10 years down the line, would you make it? Remember this answer, because I'll be asking the same question again at the end of this article.
My hope is that this article will bring to light a perspective that you haven't considered when comparing a loan mod to short sale or foreclosure.
Consider two homeowners: Alan and Bob.
Alan and Bob are neighbors with the same floorplan.
They also purchased their homes at the exact same time in 2006 for 400k.
Today their home is worth...
200k.
The economy hits both of them hard, but the two of them respond quite differently.
Please pay close attention to these two examples and try to follow the math: Alan decides he is going to "do the right thing" and make arrangements with the bank to do a loan mod and keep the home.
After months and months of lost faxes and piles of paperwork, the bank agrees to reduce Alan's mortgage payment from $3200/month to $2800/month (this would be a decent mod).
The terms: They reduce interest rate to 3% for first 5years and increase it to 5% cap after that time.
The payment is still very expensive, but Alan penny pinches in every regard.
He pulls his kids out of private school, eliminates family vacations, and stops eating out, BUT...
they are able to keep the home.
NOW fast forward 7 years down the road and the market values have finally gone back up.
The home that Alan bought at 400k is now once again worth 400k!! Alan doesn't have equity, but at least he finally is not underwater any longer.
Bob takes a different approach and says, "FORGET THIS!!".
He decides to do a short sale and sells his home to a new buyer with the help of a short sale broker for the market value of $200k.
Bob moves his family into a rental home for 2 years at $1500/month and during that time re-establishes good credit lines.
After two years, Bob decides to buy a home again and purchases in the same neighborhood he was before and even buys a slightly larger home.
Let's say values have increased slightly over this 2 year period and Bob pays $230k for his new home.
His mortgage payment is $1700.
Fast forward 5 years (2years renting+5years in new home 7 years from start) and values have again went up to previous values and Bob's home is now worth 400k.
So after 7 years how do Alan and Bob differ? 1) Bob has built $170,000 equity into his home.
Alan is no longer negative, but has $0 equity 2) Alan has been struggled with his high payment and eliminated all vacation, eating out, etc.
Bob on the other hand has been going to the movies, taking vacations and not stressing too much about money because his mortgage is almost HALF of what it was.
3) In this example, Bob scored a slightly larger home The other difference between the two approaches is that Bob had to move his family two times, whereas Alan was able to stay in the same home and not deal with the hassle of packing and relocating.
SO...
if you knew this example had validity, would you make the decision to deal with the hassle of moving it meant it would put your family in a far better position, 2 years, 5 years, 10 years from now? The decision is yours - good luck!