Chicago Loan Modification vs. Short Sale

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We get asked on a regular basis about what we think of Loan Modifications vs. Short Selling your house. From a financial standpoint, in today’s market, short selling is going to be a much better choice than a loan modification
for most families. A loan modification might make more sense if the home in question is only slightly underwater but that’s hardly the case with most homes purchased in the last 6 or 7 years.

In this cycle many people are short selling their homes. Most families doing the loan modifications will come out of this worse off than those short selling their home.

(SEE EXAMPLE BELOW)

Let’s compare 2 different families:

Let’s take a look at what’s likely to happen by doing a comparison. We’ll assume the market is bottoming; it will stay there for 5 years and then start going up at a normal 3% per year. Assume interest rates remain low but not as low as today (let’s say 7% in 5 years). Assume each bought a home for $500k that’s now worth $250k and will be worth the same in 5 years. For ease of comparison we will assume tax and insurance is $600/mo

Family A, has a 500k ARM (Adjustable rate mortgage) on a home that has lost half it’s value due to the current market conditions. They are upside down but think the market will recover in time so they decide to apply for a loan modification. They get a modification locking the rate at 4% for 5 years. Payments are $2400 plus tax and insurance for a total of around $3000 per month. In 5 years they will have paid $144,000 with little of that being principal. At the end of five years they will still owe $452k and the payments will reset to 7% taking it to $3007/mo, plus tax and insurance for a total of roughly 3600/mo. At the end of 5 years, family A is still $200k upside down, trapped and unable to sell, and unless their income rose they still might be facing foreclosure.

Family B also has a $500k loan on a house worth $250k. They however choose to do a short sale and move into a rental property. They rent a similar home for $1800/mo. The net difference in total monthly payments between family A and family B is roughly $1200/mo. Family B saves this $1200/mo and after 5 years has $72k in the bank. After 2 to 5 years their credit is good and they can once again purchase another home. They purchase a home similar to family A’s home for $250k using 20% down (50K), they finance $200k at 7% for monthly payment of $1350 plus tax and insurance or roughly $1900/mo.

After 5 years both families own similar homes:

Family A owes $450k and has a payment of $3600/mo.

Family B owes $200k and has a payment of $1900/mo. That’s $1700/mo less and they owe $250k less on the home. If they were to apply that extra $1700 to their monthly payments they would pay off the home in about 7 years!!

This comparison is not assuming the worst case. Homes could fall much farther than 50%, interest rates could go much higher than 7%. This is a simplistic comparison but it is probably fairly accurate. It gives a chilling indication of what the banks and the government are trying to do to the unsuspecting homeowners. Many of these people really do think the government and the banks are trying to “help them” stay in their homes. That’s just not the case. The government and banks are simply trying to avoid a collapse of the banks. Helping the home owner is the
last thing on their minds.

Most people are stunned when they do the math. We have given advice to quite a few people and most of them do see the light. The really amazing thing is that a couple of them still pursued loan modifications.

For more information on how to avoid foreclosures by putting your property up as a short sale in the Chicagoland area, get in touch with Certified Short Sale Specialists – James and Denise Orrico today at (630) 279-6732. Visit their website at orricoteam.com to find out more about short sales.

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