No matter how careful people are, debts can get on top of them. For almost every family, the monthly mortgage installment will be their biggest payment. If there’s an emergency of some kind and more money has to be borrowed on a loan or credit cards, this can disturb the delicate balance between paycheck and monthly payments. What was affordable suddenly becomes unaffordable. How should families react when disaster strikes? The first rule is always to communicate with your lenders. If you have a problem, they should be the first to know. The second rule is to keep paying as much as you can on all your liabilities. The moment you stop, this sacrifices every creditor’s sympathy for your problems. You are now a delinquent, and penalties and service charges will drive up the amount owing. Can this all be avoided? Well, with some care, you can talk some lenders into modifying the loan or refinancing the debt. The modification you want from your mortgage provider is some reduction in the monthly installment. This may come from extending the term of the loan or from reducing the interest rate applied. Why should a lender modify the loan? The problem for lenders is that foreclosure is a sledgehammer remedy to crack a nut. If the lender does foreclose, there is a small mountain of fees to be paid to end up with ownership of a property it cannot sell in a depressed market. Indeed, lenders are now looking at increased costs to maintain and repair properties to prevent further losses in value. None of these costs will ever be recovered from the borrowers, particularly if they are forced into bankruptcy. It is more cost-effective to take less from a borrower and leave the house occupied. This preserves the asset value and keeps some money coming in from the borrower. Most lenders now have a dedicated department to deal with modification applications. Applying for relief is more likely to receive a constructive response today. President Obama has pushed through a package called “Making Home Affordable”. It covers both mortgage refinancing and modification. If you qualify, lenders must reduce your monthly repayments so that they are less than 31% of your income. To qualify, you must be current on your loan with no payment more than 30 days overdue. You must be able to show the resale value of your home has dropped by more than 15% and that your personal circumstances justify federal assistance. For these purposes, anyone with a mortgage from Fannie Mae or Freddie Mac qualifies automatically. This can entitle you to interest as low as 2% with all the lender’s losses covered by the government and represents an excellent deal if you can bring yourself within the terms of the scheme. If you do not qualify, it will come down to you or a professional advisor acting on your behalf to talk the mortgage lender into agreeing a refinancing package on favorable terms. It’s in everyone’s interests that you save on mortgage installments and keep making some repayments to the lender. This way leads to peace of mind, knowing that the ownership of your home is secure.
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