The lender is going to come out on top. That's almost inevitable. It might be helpful, when you're thinking about a loan modification, to pretend that you're in Vegas. Think of your lender as a casino that wants your money. You want to win, but odds are, if you aren't careful, you're going to lose your shirt.
After all, a loan modification isn't a refinance. You refinance when you want a better interest rate, and you have the good credit to get it.
As a general rule, you tend to modify a loan when your credit is bad enough that you can't refinance the loan -- so your lender changes the terms of how you're borrowing for this current loan, so you can get back on your feet and continue paying off the loan. As Steven Hinrichs, a plumber in Willernie, Minnesota, found out, this almost always means that while your payments may become lower, the length of your loan stretches out much further.
Loan modifications are confusing. Partially because of the abundance of legalese in the paperwork, it's easy to agree to something you don't realize you're agreeing to.
That's what happened to Hinrichs.
"My husband did a loan modification on our home several years ago, before we knew each other. What was interesting is that they modified the terms of the loan, however, rather than forgive $40,000, which he was led to believe was happening. That $40,000 is tacked onto the end of the loan," says Hinrichs' wife, Kristin, who owns the company Best in Learning, which provides training products and services for businesses. "They made the payments affordable, but it was a surprise when trying to refinance that the equity that he thought he had was not there."
If you've been through a loan modification, or know something about the process, it isn't surprising that a bank would shift money owed to the back of a loan rather than forgive it entirely (see previous section; the lender is going to come out on top), but Hinrichs says he received a flurry of documents in the mail and had a short phone conversation with someone from his lender. He doesn't believe he was purposefully misled, but nobody spelled out how the modification would work, either.
"They knew what they were going to do before they did it," says Steven Hinrichs, who modified his loan during the recession and when a loved one was sick; he was buried in medical bills.
"They never explained if I had any options," says Hinrichs, who justifies his reluctance to ask a lot of questions by adding: "When you're losing your house, you have a tendency to look at things a little differently."
Hinrichs concedes that he may have well taken the deal anyway, but he would have appreciated more clarity from his bank.
One reason loan modifications are perplexing is that there isn't one approach to modifying a loan. For instance, just because you modified your student loans, for instance, doesn't mean it will work as easily for your home or car, which have their own quirks. Some federal student loans allow you to skip some payments for a few months or a year -- with no interest added. But other federal student loans don't.
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