A Mortgage Loan Modification – What is it? Can it help you?

If you are behind on your mortgage or if you are barely able to make your monthly mortgage payment you should consider contacting your mortgage company to ask about a mortgage modification. What exactly is a modification? Simply put, a modification is an agreement you reach with your lender that allows you to modify the original terms of your mortgage. If you are late with your mortgage payments your lender may agree to a modification to allow you to pay back the late mortgage payments over time. You may also be able to convert a variable rate mortgage to a fixed rate mortgage and lower your payments by lowering your interest rate or lengthening the term of your loan. When exploring a possible mortgage modification there are several factors you should consider.

What are your options?

If you have equity in your home and a steady income you may be able to refinance your mortgage with a new lender and obtain a better rate then you could obtain through a modification. However, if you are late on your mortgage payment and your credit score has declined, your ability to refinance with a new lender may not be a viable option. You also should consider your ultimate goal. Do you want to stay in your home? Is there any equity in your home? Can you sell your home and walk away with cash? Do you have other debts? Should you file for bankruptcy? These are all questions that you should evaluate before deciding if it would be beneficial to request a loan modification.

How does the loan modification process work?

All lenders are different but the overall process is the essentially the same. You, as the borrower, need to call you lender (and yes – be prepared to wait on the phone for some time) and request a loan modification. You will likely be directed to the mortgage workout or distressed loan group. Once you get to the correct person you will be asked to complete a detailed application which lists your current financial status. This information will be used by the lender to evaluate if a loan modification will be offered to you. A lender does not have to offer you a modification. However, the last thing lenders want is another property in foreclosure.

Be careful to analyze the terms of any modified loan.

If your lender offers a modification, be careful to understand exactly what is being offered. Before you start to analyze the new terms of the modified loan you should know the following facts about your current loan:

1. What is your current balance – i.e. how much do you think you owe?
2. What is your current interest rate – is it fixed or variable?
3. What is the remaining term of your loan – i.e. in how many years are left? and
4. What is your currently monthly payment – and does it include payment of taxes and insurance?

You should compare the above items from your existing loan with the offer from the lender for the modified loan. If the loan balance under the modified loan increases significantly over the amount you think you owe now make sure you understand how the lender arrived at that new loan amount. Does the new loan amount include significant penalties, interest, legal fees etc. While you may not be in the best bargaining position to demand any changes, at the very least you need to understand what you are agreeing to do. A comparison of the new rate and the length of the loan is very easy to make. If your interest rate was a 7% variable rate note and the lender is offering you a 5% fixed rate that is very good. If the rate goes up, or goes from fixed to variable (not likely to happen but possible) that would not be in your favor.

Does the modification lengthen the term of the loan? If you loan is currently set to expire in 10 years and the modified loan is 15 years you should know this fact. The addition of extra years is one of the ways that lenders use to reduce your monthly payment and also pay back past due amounts. While it is never good to add more years to the loan, the benefit of reducing the monthly mortgage payment may justify the extension of the loan term.

Finally, how does the modification impact your loan payments? Are you having trouble paying your mortgage because of a temporary or permanent issue? If the problem was temporary, you may not need a reduction in the monthly payments. If it is a long term problem, a reduction in payments may be a necessity. If you need a payment reduction be careful to understand if the payment being offered includes taxes and insurance. If the payment number is $600 lower than your current payment but does not include taxes and insurance, then you may not have any real savings. Make sure you are making an accurate comparison of any modified payment figure.

If you need a mortgage modification it is imperative that you understand what is being offered so you can try to negotiate the best deal possible. It never hurts to ask if something else can be done. With the current flood of bank owned properties the lenders may be more willing than you think to work with you so you can stay in your home.

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