The economy is struggling to retrieve, unemployment is high, and as a consequence there are a lot of people who are behind on their mortgage payments and at risk of having their home foreclosed. To help people save 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 mortgage in record numbers. But before modifying a mortgage loan, homeowners should weigh the true cost of refinancing their mortgage and consider curing mortgage arrears in a Chapter 13 bankruptcy case instead.
Loan modifications are often a long course of action. Many of my clients who apply for a loan alteration, don’t receive a response until a year after the time of action began. After months of submitting documents, jumping by one hoop after another, they are often turned down for their loan alteration and end up filing bankruptcy to save their home.
Modifications may include closing costs which may or may not be rolled into the alternation loan, further increasing the amount financed. In addition, once mortgage arrears are included in the new loan they begin to incur interest, so curing $10,000 in mortgage arrears could end up costing the debtor $30,000 or more over the life of the loan.
In some instances filing Chapter 13 bankruptcy may be a better different to a loan alteration. In the Northern District of Texas, mortgage arrears repaid in a Chapter 13 bankruptcy are paid without interest, so the cost of curing mortgage arrears is often lower than it would be in a alternation loan. Most homeowners are eligible for Chapter 13 bankruptcy, and the time of action does not require a long application course of action.
To determine whether Chapter 13 bankruptcy or a alteration is the best option, homeowners should take into account whether the loan alteration simply cures the mortgage arrears or whether it truly lowers the interest rate. If it lowers the interest rate then a loan alteration may be a better option than Chapter 13 bankruptcy because the cost of paying interest on the mortgage arrears cured in the loan alteration may be offset by the savings gotten from the reduction in the interest rate. However, if the interest rate stays the same and the only assistance of refinancing the mortgage is curing the mortgage arrears, then the homeowner should consider whether Chapter 13 bankruptcy might be a better option.