How the Plan Works & Is it Advisable?
Obama's plan works in order for terms to be adjusted to make the second mortgage more affordable. For example, lenders would automatically lower interest rates on the second mortgage when the first mortgage is adjusted. The lender can lower interest rates to one percent on second mortgages where the borrower is paying off both the principal and the interest. The lender can also reduce interest rates to two percent when the borrower is repaying interest only.
Second-tier lenders may take a huge financial hit with this program. If any part of the principal of the first mortgage loan is forgiven by a first-tier lender, the second-tier lender must forgive the exact same amount. This is why lending companies are hesitating to jump on the wagon for this program because the terms are not favorable for their profits.
We won't know if more lenders than Bank of America will choose to sign up and if homeowners will have this option until fall 2010.
Yet if it becomes available, is loan modification advisable?
It depends on your situation. Anything is better than a short sale or foreclosure, so in that case, yes. Modify the loan to keep your home. Other advantages include lower interest rates and lower monthly payments. Also, this is settled in a private manner between the homeowner and the lending company. Loan modification can offer stress relief and the ability to sleep at night.
On the other hand, loan modification has its downfalls. Be prepared for a plummeting credit score, which was probably already decreasing from missed mortgage payments, and you must prove to the lender that you are in financial dire straits. Thus, future lending opportunities are probably not possible. Your equity will be negative--the exact opposite of what home equity should be.
If you are interested in loan modification, beware of scams. Scam artists are now coming out of the woodwork posing to be "lending companies" that will help you modify a loan. Only trust reputable lending providers.
Now that you know you can modify a second mortgage, examine all your options closely. Modification may be the perfect solution or a hindrance to your financial standing and home equity. Discuss modification options with a trusted lending company and make the best choice for you and your family.