About Mortgage Loan Modifications

Homeowners who have difficulty paying their mortgage payment may benefit from a mortgage loan modification. A loan modification is similar to a refinance. However, this process is much cheaper, and homeowners do not have to pay out of pocket expenses such as settlement fees, appraisal fees and other mortgage-related expenses. Because a mortgage loan modification can help borrowers stay in their homes, some lenders are prepared to change the terms of a loan, especially if it means avoiding a costly foreclosure.

Function

When a mortgage lender agrees to a mortgage loan modification, they agree to change the original loan terms. Normally, homeowners would have to apply for a mortgage refinance. However, refinances are expensive. And with the current mortgage loan requirements, some borrowers do not qualify for a new home loan. With a mortgage loan modification, borrowers can contact their existing lender and negotiate better loan terms. To accommodate borrowers, lenders may grant a lower interest rate or extend the mortgage loan term.

Types

There are different types of mortgage loan modifications. Lenders have to assess each borrower's situation and determine the best course of action. The objective is to keep borrowers in their home and help them afford their monthly payments. Hence, mortgage lenders may modify an existing loan and convert an interest-only or adjustable rate mortgage to a fixed rate home loan. If the borrower has a fixed rate loan, the lender may lower the interest rate, which ultimately lowers the monthly payment. Additionally, a modification may involve increasing the loan term, which can also lower a borrower's monthly obligation.

Misconceptions

Some people confuse a mortgage modification with a mortgage refinance. Both a modification and refinance can achieve similar goals such as lowering a mortgage rate and extending a loan term. However, a modification does not create a new home loan. Persons who apply for a refinance have to complete a new mortgage loan, wait for approval and pay mortgage fees. With a modification, borrowers cooperate with their present lender to change the terms of the original agreement.

Benefits

A mortgage loan modification primarily benefits borrowers. Although a refinance is a feasible alternative, the majority of homeowners do not have the disposable income to apply for a refinance. Rather than settle for costly loan terms, they have the opportunity to lower their monthly expenses and remain in their home. This provision can help millions of homeowners with dangerous sub prime, adjustable rate, interest-only and high-interest home loans.

Warning

Although a mortgage loan modification was developed to help distressed homeowners, mortgage lenders are not obligated to agree to a loan modification. Several factors determine whether a lender will modify a home loan. They usually take the borrower's credit history into account. Lenders consider whether a borrower pays their home loan on time, and whether they have been cooperative.