There are several ways that homeowners can petition the bank for loan modifications and one of the least common but most effective are loan modifications through 40 year mortgages. Adding ten years to the amortization period helps the borrower by reducing their monthly payment substantially because the longer period of time to pay off the loan means more installment payments than the typical 30 year mortgage. For new borrowers 40 year mortgages can mean the difference between qualifying for a loan or being declined by the lender.
Most borrowers do not realize that only a small portion of their monthly payment on an amortized (principal and interest) loan goes towards principal. For instance on a monthly payment of $2600, only about $400 will go towards principal reduction during the first ten years of the loan term, the rest goes towards interest. This signifies that over the course of a 30 or 40 year term, the amount of interest paid can easily be equal to twice or three times what original principal balance was at the time of loan origination.
40 year mortgages can be paid off sooner and most responsible and caring loan officers will advise their clients to make one extra payment each year in order to reduce the principal. For instance, if your loan payment is due once a month, you can request the bank to schedule your automatic withdrawal for the mortgage payment every four weeks as opposed to once a month. At the end of the year this will add one extra payment to your loan term and that payment will be one hundred percent payable towards principal balance reduction and not towards interest.
When a bank negotiator approves loan modifications for clients, one of the methods that can be utilized are 40 year mortgages. Another is straight interest rate reduction and yet another is principal balance reduction. Many banks will do a combination of these in order to satisfy the investor who holds the note and give financial relief to the beleaguered borrower who may find himself owing more to the bank than the home or property is worth.
The point of a successful loan modification is to relieve the financial hardship on today’s homeowners who are regularly besotted with a plethora of ever widening financial difficulties. Over the last few years mortgage bankers have seen a sharp rise in the number of foreclosures in the private sector. People are losing their homes on a massive scale never before seen in the U.S. 40 year mortgages can help to alleviate these financial woes before they result in losing the property to the bank.