All the discussion over the trouble in the mortgage industry and possible solutions to help fix it and save distressed homeowners can get confusing. Not all industry experts agree on which mortgage debt solution is best and, in many cases, the answer really depends on the situation of the homeowner.
Mortgage refinancing is gaining popularity these days as interest rates hover around appealing lows, but not everyone stands to benefit from a refinancing deal. First, homeowners often find gaining approval for refinancing to be difficult, even with the help of the federal HARP. Also, lenders lose money in refinancing as lowering the interest rate on the loan takes away much of their potential for profit. However, if refinancing prevents a foreclosure down the road both the homeowner and lender are better off for having refinanced the loan.
One of the most elusive options in recent years has been loan modifications. As the option of choice for homeowners, many lenders have denied otherwise qualified borrowers simply to avoid taking a hit to profitability. Homeowners looking to lower their payments by extending the life of the loan or suspending payments often found it easier to gain approval from lenders than those requesting to lower interest rates or principal loan amounts. However, loan modifications are being pushed by government officials and offering lender incentives in exchange for lowering principals on underwater homes.
Once thought of as taboo, short sales are becoming a popular alternative to foreclosure among homeowners who may not be able to secure or benefit from refinancing or a loan modification. Allowing the homeowner to be relieved of their debt liability in exchange for selling the home, lenders do face the majority of risk. The home is often sold for less than what is owed on the loan, but lenders have found that a short sale is likely to sell for 30 or more percent higher than if the home enters foreclosure.