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The economy is struggling to recover, unemployment is high, and as a result there are many people who are behind on their mortgage payments and at risk of foreclosing on their home. To help people save on their homes, mortgage companies and the federal government are touting the benefits of loan modifications and homeowners are buying into the idea of modifying their mortgages in record numbers. But before modifying a mortgage loan, homeowners should weigh the true cost of refinancing their mortgage and consider fixing the mortgage arrears in a Chapter 13 bankruptcy case instead.
Loan modification is often a long process. Many of my clients who apply for a loan modification do not receive a response until a year after the process is initiated. After months of submitting documents, jumping through one hoop after another, they are often turned down for their loan modification and end up filing bankruptcy to save their home.
Modifications may include closing costs that may or may not be included in the modified loan, further increasing the amount financed. In addition, once mortgage arrears are incorporated into the new loan they begin to charge interest, so treating $10,000 in mortgage arrears could end up costing the borrower $30,000 or more over the life of the loan.
In some instances, filing Chapter 13 bankruptcy may be a better alternative to debt modification. In the Northern District of Texas, mortgage arrears repaid in Chapter 13 bankruptcy are paid without interest, so the cost of fixing mortgage arrears is often less than a modified loan. Most landlords are eligible for Chapter 13 bankruptcy, and the process does not require a lengthy application process.
To determine whether Chapter 13 bankruptcy or a modification is the best option, homeowners must consider whether the loan modification simply fixes the mortgage arrears or whether it actually lowers the interest rate. If it lowers the interest rate, a loan modification may be a better option than Chapter 13 bankruptcy because the cost of paying interest on the mortgage balance fixed in the loan modification is offset by the savings from the interest rate reduction. Can However, if the interest rate remains the same and the only benefit to refinancing the mortgage is curing the mortgage arrears, the homeowner should consider whether Chapter 13 bankruptcy may be a better option.
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