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Loan modification with balloon payment - what is it all about?
The majority of home loan modification agreements, no matter if they last 5 years or up to 40 years, contain a balloon payment. The truth is, most agreements with drastically lower interest rates have balloon payments. Over time we have seen that the best interest rates tend to come with these higher payments at the end, but you also have to understand, loan modification is not meant to be a permanent solution to financial hardship.
The concept of loan modification with balloon payment puts some homeowners off, but balloon payments are a completely normal part of modifications as they are part of a lot of 'regular' mortgage agreements. It puts some home owners off because they have the feeling that modification is a save-all, but really they are only meant to be a temporary source of help.
A balloon payment is when, near the end of the modification agreement terms, the payments suddenly rise to make up for the amount that was not paid. Some of these payments can make payments jump to be almost double that of that they were after modified. It is simply the lending company trying to catch up.
Some lenders do offer programs that do not include balloon payments at the end of the term, though they generally do not offer great interest rates. Any homeowner who is interested in the programs their lender offers can simply call their modifications or loss mitigation department to get the information. Asking about whether specific programs to have balloon payments is a good idea, as sometimes that is not mentioned at the start.
Modifications with a shorter term usually have higher balloon payments, and generally homeowners who are not sure when their financial hardship will end should opt for the longer term modifications to ensure they will be able to handle the sudden higher payments later on.
Anyone considering modification should be aware that it shouldn't be seen as a lender doing a favor, they are trying to get their money while you are trying to keep your home. If anything, this is shown in most lending companies' reluctance to accept modification applications -- 89% of homeowners who get modifications can't even make the first payment. So anyone trying to get modification should be sure that they can handle even a lower interest rate.
The long and the short of it is, a loan modification with balloon payment shouldn't be seen as a bad thing. And seeing a modification as an instant catch-all solution or favor is only going to be harmful in the long run. A modified mortgage should be taken even more seriously than one unmodified.
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