ADVANTAGES OF A SHORT SALE OVER LOAN MODIFICATION

Short Sales are FREE!!!

10 Year Example

For many home owners that are “under water”, short selling their properties will benefit them far more than modifying their current loan terms. Take the example below:

Sample Under Water Mortgage
125 Thirdth Ave.
Los Angeles, CA 90010
3 Bed 2 Bath  1540 Sq. Feet    Built 1988

Purchase Price:                                    $550,000
Principal Balance:                                $500,000
Interest rate:                                                7%
Loan term:                                             30 years
Principal and Interest:                          $3,327/month
Taxes and Insurance payments:          $630/month
Total Mortgage Payments:                    $3,957.00

Property Value:                                     $350,000
Equity: -$150,000 (negative)

Sample Modification:
Principal Balance (unchanged):            $500,000
Interest rate (reduced):                               4%
Loan term (increased):                           40 years
Principal and Interest:                           $2,090/month
Taxes and Insurance:                            $630/month
Total Mortgage Payments:                     $2,720.00
Property Value:                                   $350,000

Equity: -$150,000 (negative)

Loan Modification Outcome: While the lower payment seems beneficial for the homeowner, they will not benefit in the long run. If a 3% property appreciation rate is considered going forward, it will take until the year 2018 for this homeowner to break even and realize any positive equity in the property.

Short Sale:

Property is sold and negative equity is cleared. In this scenario, the individual or family will lease a property for the next 2 years (this is how long it will usually take to purchase a property after a short sale). The new property does not have to be a step down. They are likely able to lease something very similar to their sold property for far less than their current mortgage payments.  They always have the option of finding a new property in their same neighborhood so that children may go to the same schools and will not even miss a day of class.


New Property:
118 5th Ave.
Los Angeles, CA 90010
3 Bed 2 Bath    1525 Sq. Feet     Built 1989
Lease payments:                           $2500

After 2 years, this family will be able to purchase a new property. Because they will now be purchasing a property for a lower price, their loan amount (debt) will also be significantly lower. The new purchase after 2 years may look something like this:
245 2nd Ave.
Los Angeles, CA 90010
3 Bed 2 Bath    1630 Sq. Feet     Built 1992

Purchase Price:                                       $360,000
Principal Balance:                                   $324,000
Interest rate:                                                  6%
Loan term:                                                 30 years
Principal and Interest:                            $1,942/month
Taxes and Insurance payments:         $425/month
Total Mortgage Payments:                    $2,367.00
Property Value:                                   $360,000
Equity: +$  36,000 (positive)

Outcome: By starting fresh, this homeowner is able to drastically reduce their debt and by the year 2019 will have over $171,000 positive equity in their property. Had they opted for a loan modification in 2009, they would just break even in 2019.