Will Loan Modification Decrease your Payments?

by tammy on May 11, 2010

Typically, decreasing the borrower’s monthly payments is the entire purpose of loan modification agreements, so generally it is safe to say that loan modification will decrease the amount due each month, at least for a while. Of course what you end up paying in the long run may well turn out to be more than would have been the case without the loan modification. Everything more or less depends on the type of agreement you reach with your lender.

Generally speaking, the lender always views borrower initiated loan modification as a negative thing, which is why virtually all loan modification agreements are reflected adversely on the borrower’s credit report. Nevertheless, some types of loan modification agreements end  up costing the borrower – you – more than they would had the loan never been modified. This happens whenever the actual interest rate and the principal owed remains untouched by the loan modification agreement. These are almost always the types of loan modification that the lenders agree to offer.

The first idea is to simply extend the amortization period of the loan, or the loan’s duration. for example, turning a twenty year mortgage into a thirty year one, or a thirty year mortgage into a forty year one. Generally the lenders aim at adding an additional ten years to the existing agreement. Since the principal is scattered over an additional 120 payments (twelve months times ten years), the monthly payment should be reduced significantly, though over time you will end up paying a lot more for the original loan than originally agreed since the interest rates still apply to the longer time period. It also means that the acquisition of equity goes much slower, since you are paying much less on the principal of the loan every month.

The other idea that lenders like to promote is that of loan forbearance. Loan forbearance is not really loan modification at all as the original agreement remains intact. However, for a given period of time, the lender agrees to accept smaller monthly payments on the understanding that once this period of time is over, the borrower has to make two monthly payments: the regular mortgage payment at the usual rate, plus a secondary payment to pay back the difference owed from the period of reduced payments. This is the option frequently offered to relatively well off borrowers with a solid income base who simply need a temporary relief period, usually due to some unforseen emergency expense (like a natural disaster or a medical emergency).

In either of these cases, the amount due each month is reduced – at least temporarily – offering the lender some relief, but in the long run end up costing you much more than you originally agreed to pay. Further, these measures will be counted negatively against your credit score. If you can get a loan modification that actually reduces the amount of interest owed, or reduces the principal owed, then both your monthly payments and your overall debt burden are reduced. However, obviously the lenders are not inclined to allow these sorts of loan modifications unless there is no other option available to prevent foreclosure and the lender agrees that foreclosure would be a worse outcome.

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