How Can Loan Modifications Help Lower Your Bills?

by tammy on April 4, 2010

 

The whole idea behind mortgage loan modification is to help homeowners that are having difficulty making their monthly mortgage payments by reducing the amount due. That is, the entire purpose behind loan modification is to lower the borrower’s monthly bills from the borrower’s perspective, while for the lender the motivation is to keep the existing mortgage intact without having to resort to foreclosure. During the real estate boom that ended abruptly in 2008, loan modification was much harder to get since most lenders stood to get more money by foreclosing and reselling the property in question, but all of that has changed since 2008. Now many lenders stand to profit if they can keep old mortgages – set to the old overvalued prices of the real estate – alive, even if that means modifying the terms of the original mortgage.

Borrower’s have to keep in mind that loan modification is purely voluntary, even among those adopting the government-sponsored Making Home Affordable (MHA) loan modification program. The lender is under no obligation to accept modification; therefore the terms have to be seen as being more beneficial than foreclosure would be. Silly efforts to coerce loan modification, like using mortgage audits, generally fail unless the borrower has the resources to maintain years of litigation, which is plainly not the case for most people facing enough financial hardship to justify looking for loan modification in the first place. 

Most loan modifications that are accepted by the lenders do not involve actually reducing the amount owed, either the principal or the interest, but instead use alternatives that can help the borrower. The most common option is to simply extend the amortization period, or the length of the loan, thereby lowering the monthly payments by dividing them over a longer period of time. The usual extension is of about ten years, though the lender may agree to more or less time than this as they deem appropriate. Another option for people that are facing a temporary financial hardship is loan forbearance, which involves letting the borrower make smaller payments – or even miss payments altogether – for a temporary period on the understanding that these amounts will be repaid in full later along an agreed time scale.

In some cases, the lender may agree to a reduction of the interest rate or even the principal owed on the property. However, since an actual reduction results in a tangible loss to the lender, this is rarely accepted unless these losses are significantly higher than the losses that result from foreclosure. Foreclosure is always an option for the lender once the borrower goes into default, which means the terms of the loan modification always have to result in more money going to the lender than would be the case if they foreclosed. The result is that although many different loan modification agreements may be deemed acceptable, the lenders always have an alternative immediately available that can be employed if the borrower fails to comply with his side of the arrangement or attempts to use coercion and threats of default.

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