Banks have been surprising homeowners with tempting, unsolicited offers to modify mortgages. The proposed loan mods come with attractive terms and a chance to wipe out part of the mortgage balance. But some borrowers find the seeming generosity suspicious.
Some of the offers give borrowers the opportunity to switch from an option adjustable-rate mortgage, or ARM, loan to a fixed-rate mortgage and include partial balance "forgiveness." They normally don't cost the borrower a penny and require only a signature.
An unasked-for modification may sound like a no-brainer at first. But when you think about the thousands of struggling borrowers who unsuccessfully beg and wrestle their lenders for a loan mod, you may wonder if this offer has a catch or if you're just lucky.
What's the catch?
Assuming you have confirmed the offer letter came from your lender and not a scammer, there's not really a catch in these loan mods.
But "keep in mind banks are not doing this out of generosity," says Howard Ullman, an attorney and owner of Family Counseling Law Firm in Deerfield Beach, Fla. "Yes, you may want to take advantage of (the loan mod), but it's important to be skeptical and understand what you're doing and why you're being offered this."
Why the 'generous' offer?
Take option ARM loans as an example. These once-popular loans allowed borrowers to skip paying the principal and part of the interest on the mortgage for a certain period, while the unpaid portion was added to the loan amount. By offering to modify these loans into fixed-rate mortgages, lenders try to prevent default, Ullman says. But mainly, they try to get these loans off their books because the government and investors view them as "toxic."
That doesn't mean you shouldn't take advantage of the situation. But before jumping on this or any other unsolicited loan modification, borrowers should learn whether the loan mod will affect their credit scores or have tax implications.
Impact on your credit
Some borrowers don't realize a loan modification may hurt their credit until months after signing the dotted line, says Norm Magnuson, vice president of public affairs at the Consumer Data Industry Association.
"We've had people call us after they got into a loan mod, and after we talk and they understand how and why it affected their credit, they realize that what they were really looking for was a refinance, not a loan mod," Magnuson says. "Loan modifications do help you out, but you probably are not going to be happy with your credit results."