Seeking More of a Mod

QUESTION:

I hired an attorney for $2,500 and was able to get a loan modification. I’m saving just less than $180 a month, and my rate was reduced from 6.5 percent to 4.75. I imagine your thoughts are possibly the same as mine: I’m not saving that much! I will soon have a 3-percent wage reduction at work, and my $180 monthly savings will not be of much help. How can I do better?

ANSWER:

I assume you hired an attorney because you could not succeed working directly with your lender. This is both good and bad – it’s bad that you could not get help from your lender but good in the sense that you were smart enough to not take a lender’s “no” for an answer.

Your loan rate has been reduced by 1.75 percent – that’s a 27-percent drop from your original rate, and it’s a very big deal. Here’s why:

If you save $180 a month, you’ll reduce your annual costs by $2,160. That’s a significant savings in most households. In effect, you’ll recoup your legal bills in about 14 months. By any standard that’s a good return on your investment.

Seen the other way, without the help of an attorney you would have spent $2,500 in excess interest in little more than a year. The view here is that your lawyer served you well.

Could you have done better? Probably not. You now have one of the lowest rates in the past 50 years.

Here’s a caution: You have a lower rate – but for how long? Five years? Or the life of the loan? If the interest rate reduction is just for five years then it may be smart to prepay your mortgage by $180 a month – the amount you would have spent without the modification – to drive down your principal balance before a higher rate returns.