Loan Modification Basics: What You Need to Know

Heard of loan modification? If you haven’t, you soon will. As more and more ARM’s reset to a higher rate, many homeowners are discovering that they can no longer afford their mortgage payment. Most try to keep up, but may end up falling behind. Others are at risk of losing their home to foreclosure.

As more homeowners begin to fall behind, the more you’ll be hearing about loan modification. So just what is it and why is it being propped up as the potential savior for homeowners in dire straits?

Whether you are in a bad situation with your mortgage, are worried about ending up there, or are just curious about loan modification in general, here are a few basics that you should understand before calling up your local loan-mod company or attorney.

What Does a “Loan Mod” Do?

There are several things that can occur as the result of a loan modification. These include:

– Lowering your interest rate
– Forgiveness of late fees
– Rolling up of delinquent payments into the modified loan
– Extension of the term

In short, you will potentially end up with a much lower monthly payment. If you are behind, your late payments will be rolled up into the new balance. In other words, you won’t be behind on your payments anymore.

Will I Have a Lower Principle Balance?

Having your principle balance (the total amount you owe) lowered is a potential occurrence, but less so of one than the above mentioned possibilities. A good company will certainly make the attempt, but a bank generally won’t lower your balance unless there is more benefit to doing so than foreclosing on the home.

One example where a bank might agree to this is if the value of the home has dropped to the point where reselling is likely to result in a bigger loss than simply lowering the balance for you. In this way, the bank is able to at least continue receiving payments from you instead of going through the hassle and cost of foreclosure and reselling at a loss.

Can It Really Save My Home?

The short answer to this question is, “Yes.” The more precise answer is, “It depends.”

Loan modification is not a cure-all. A reliable and trusted company will do everything in their power to work with your lending institution to get payments to a point where they are affordable for you. However, this implies that you have some ability to make the new adjusted payment amount.

If you have financial discipline and make enough to afford the new payment, then absolutely loan modification can help you save your home.