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  • The government’s Home Affordable Modification Program is a powerful tool for homeowners who cannot afford their current mortgage payments, but can avoid foreclosure if only their mortgage provider is willing to modify their terms. The program does this by either extending the term of the loan—that is the amount of years you have to pay it—reducing the interest rate, forgiving a chunk of the loan (as you might have guessed this is not so common), by taking a portion of the loan out of the loan and postponing payment till the end of the mortgage term (also known as a balloon payment) or a combination of all the above.

    However, as useful as this program is, it is not for everyone. To qualify you must be able to meet the eligibility requirements of the program, which is designed to filter out homeowners who simply cannot afford a reasonable mortgage payment and help those who do have the financial circumstances to take care of a modified loan. Of course, many people who are able to pay for reasonable priced monthly mortgage payments fall through the cracks of the program because they do not do their homework and provide their mortgage servicers with the information they need to approve their loan modification application. This is often because the homeowner does not understand what is required or the meaning of some of the technical terms used in the literature provided by the HAMP program and the lender. This series aims to bring some clarity to the more complicated terms and processes included in the Home Affordable Modification Program.

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    What is Your Net Present Value, or NPV?

    The net present value model is an important tool in the Home Affordable Modification Program. It is an equation (see formula above) that computes the reliability of future cash investments and is used widely in business to determine the profitability of an investment. In the mortgage setting the NPV assesses the likelihood of mortgage lenders profiting from a loan modification.

    Your net present value can be seen as a test which you can either pass or fail depending on if it is positive or negative. Your NPV is positive when the total discounted value of the expected cash flows for your proposed modified loan is higher than the total discounted value of expected cash flows without a loan modification. Wow, that was a mouthful. Put more simply, the NPV test determines whether modifying your loan is beneficial for the lender. If your NPV is negative it generally means your lender is better off not modifying your loan. Borrowers who score a positive NPV are viewed as a good investment to lenders because they are more likely to pay their mortgage and increase the returns on the lender’s investment with a loan modification than without.

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