Loan Modification in final stages. Don't know if I am getting the best deal. Help?

by Dean
(St Louis, MO )

by Allen
(Southern California)

My lender is Citi. We have a Freddie Mac loan. I just spoke with our underwriter who told me they can lower our interest from 5.125% (on our interest only) down to 3.125% fixed rate over 40 years. We would save about $2500 a year, HOWEVER, our monthly payments would actually increase about $500 because of the impounds for tax and insurance. I've heard stories of loans being modified down to 2% over the same term. Were those stories bogus? The underwriter told me that 3% is Freddie Mac's floor rate. Is this correct? Does this look like a good offer?

Mortgage Loan Modification Answer:

At first glance, it seems CitiMortgage's loan modification offer is reasonable. It all depends on your long term objective. Are you planning to live in your house forever or do you have plans to move in 5 years or so?

If you are planning to stay in your house for the long haul, then I'd say take the offer because it is a very good fixed rate that will not change regardless of how long term rates change in the future. They will likely go up in the future once an economic recovery is in progress.

The lower rate means most of your payments will be going to pay off your principal every month, as opposed to interest-only payments where nothing goes to pay off the principal. And don't forget that when your interest-only period is over, your payments will jump up substantially when principal payments are added and you will have much less time to pay it back because it will be amortized for the remaining years left on your loan term. No doubt it will be a very large increase, unless you plan to refinance your loan at the end of the interest-only period --- which in itself will not guarantee a lower payment because no one can predict where mortgage rates will be at that time.


The fact that Citi extended the term to 40 years also helps lower your payments to make it more affordable.

And the fact that they are going to impound your property tax and insurance payments is not unusual. Mind you, these are not additional payments. You were and will have to keep making these payments to the county tax assessor and to your insurance company anyway.

The only thing that changes is you will have to make the property tax and insurance payments monthly along with your mortgage loan payments instead of making the payments at your own discretion during the course of the year when they become due and payable.

I'm not familiar with what Freddie Mac's floor rates are for loan modification today.

Dean, any idea? Please chime in if you have information on this subject.

Additional Loan Modification Answer:

I don't know what Freddie Mac's floor rate is set at. I have heard comments that a lender offered 2%, but have never seen anything below 3%. When I have seen a 3% rate offered it was like 3% for two years and and 4% for two years and then 5% for one year and then set to market rate in year 6.

The question did not state the full terms of the offer including when the interest only loan converts to principal payments. If as you say the 3% is for the 40 year life of the loan that is something I would consider (be sure that the 3% is for the life of the loan and there is no escalation clause or it is limited to 2% upward for the life of the loan). If you are planning on staying in the property for a long time, go to a web site and run and amortization based on when the principal starts and you can get an idea of your payment. Commerce Clearing House has the most comprehensive financial calculators>

Hope this is helpful