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Glendale, CA Real Estate – Jennifer Escobar a Realtor at Qwest Real Estate recently received a question from Luis.

Here is Luis’s Question.

“I am working on a loan modification on my home. I just don’t want to be upside down and want a fair interest rate. Why should I pay on a mortgage that is twice as much as my home is worth, plus the interest on that mortgage? It just doesn’t make sense.

How can I get a loan modification with a fair interest rate where I am repaying what my home is worth today? Thank for your help, Luis.”

Here was my answer.

"You are asking for something that most lenders don’t like to do. Lenders don’t like principal reductions. Here is why!

Principal reductions usually have to be written down right away on their financial books. If you owe them $300,000 and they reduce your loan principal to $150,000, then they immediately have to reduce the company’s earnings by $150,000 for that fiscal year.

If they do that on enough loans, then it hurts the CEO’s ability to get a bonus. He may even risk losing his job. I don’t offer much sympathy to CEOs, but that’s how it works.

Here is what lenders like to do instead. They will reduce your interest rate to 2% for 5 years. After that, the interest rate will go back to the original level.

That way the write off will be much smaller than $150,000. It might be a $30,000 write off. That makes a much smaller difference on the CEO’s bonus for the year.

It’s also one of the reasons that most loan mod programs don’t work. The banks aren’t willing to be realistic.

It’s also why I think a short sale is the best principal reduction plan. You get to erase the bad debt. Rent a home for 2-3 years and then buy a new one at today’s market level."

Thanks for reading this, Jennifer Escobar.

Jennifer is a Real Estate Agent at Qwest Real Estate.

My BLOG: www.Glendale-ShortSales.com

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