By: Lance T. Denha, Esq.
If you’ve been granted a loan modification in the past, your interest rate may be set to increase in the near future. For those homeowners who received a modification under the terms of the Home Affordable Modification Program (HAMP) almost five years ago when this governmental program was initiated, your interest rate may be set to increase in year six. If you had your interest modified to an amount below the market rate, HAMP allows an interest rate increase of no more than one percent per year. These increases can continue until the interest rate reaches a rate cap which should be spelled out in the agreement you signed as part of the loan modification paperwork.
For example, a typical HAMP modification plan granted to homeowners may have provided for the following: Interest rates under the modification plan from years 1-5 at a 2.0%, then years 6-7 to increase to a 3% interest rate, and finally years 7 throughout the duration of the loan, the interest rate will be determined at the market rate at the time. How would an increase in interest rate affect payment and the ability of the homeowner to remain current? Based upon recent data, nearly 3 in 10 Americans have no savings for an emergency arising or changes to their budget. This can have a devastating impact on homeowners that are now current on their mortgage payments set to increase in the near future.
In addition, recently there have been signs that people are taking on debt again and relying more on their credit cards. The reliance on credit cards and the lack of an emergency fund of any duration place a further burden on homeowners that have been constantly juggling their budget or are falling behind on other obligations in the desperate attempt to remain current with their mortgage. It’s not clear whether American’s taking on additional debt is by choice or necessity. This is a tenuous position for a struggling homeowner who is current with their mortgage, but lacks a safety net in the event of a loss of income or unexpected expenses.
It’s more prudent to prepare now for these potential financial problems before they become a reality when mortgage payments increase. It is highly advisable to seek legal expertise to determine the best course of action in order to gain an understanding of the particular direction best suited for the client. Be sure you fully understand the interest rate changes that may affect you in the future. If you are due for interest rate increases after the five year period mentioned above, calculate how that may affect your ability to pay and what savings or other financial planning you need to stay current with your mortgage payments once the interest rate does increase.