Can you Really Decrease Payments with a Loan Modification?

by tammy on March 5, 2010

In a word: “yes”. In fact the entire purpose of most mortgage loan modification efforts is to reduce the borrower’s monthly payments to a more tolerable level in order to avoid foreclosure on the property. While loan modification may not be in the lender’s best interest in times of increasing property values, in times such as these – with foreclosures continuing to escalate, property values bottoming out, and market saturation – it is usually in the lender’s interest to avoid foreclosure and work with borrowers in order to do so.

Mortgage loan modification can be accomplished in many different ways. More often than not the lenders will suggest modifications that do not actually lower the amount owed, but make the monthly payments more reasonable. One of the most popular ways of doing this is to extend the length of the loan. If the loan is extended for a longer period of time, there are more monthly payments due, which means the actual amount of each monthly payment can be reduced as it is spread out over the increased number of payments. Another option popular with lenders is loan forbearance. This is an agreement whereby the borrower is allowed a period of time in which they pay lower amounts (or even no amounts) for a given period of time on the promise that they will make up these amounts at some point in the future as agreed.

Despite the fact that the lenders will rarely – if ever – recommend an agreement that results in an actual reduction in the amount owed, if such a suggestion is made by the borrower, the lender may decide to agree in order to avoid foreclosure. Therefore, depending on the exact circumstances, it may be in the borrower’s interest to ask for a reduction in the interest rate, or even a reduction of the principal owed. Whether or not a lender will agree to these terms depends on both the financial situation of the borrower as well as the lender, so nothing is guaranteed. However, if the amount of the requested reduction is significantly less than the amount likely to be realized through foreclosure, the lender may decide to agree to an actual reduction.

Other possible options include modifications to the way the interest is calculated, reducing or stopping late fees and penalties, or capping the maximum monthly payment based on the borrower’s monthly income or some other number agreed upon by both parties. The ways a mortgage can be modified is really only limited by one’s imagination, however the borrower has to keep in mind that whatever terms are proposed have to result in more money to the lender than they would realize through foreclosure. This means the existing condition of the borrower’s local real estate market has a lot to do with how much the lenders are willing to compromise. If the property is in an area where the real estate market is rebounding and property values are increasing, then the lenders will be much less likely to agree major modifications of a preexisting mortgage.

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