Is a Loan Modification for You? (02/15/2009)
A home loan modification, granted only upon the existing lender's approval, permanently reworks some of the terms of an existing mortgage in order to make the loan more affordable to the homeowner.
The strategy is typically designed for homeowners struggling to pay their mortgage, not for those who can pay their mortgage or are eligible for a refinanced loan.
Modifications are generally lender fee-free and involve the lender or loan holder lowering the interest rate and or changing an adjustable-rate mortgage (ARM) to a fixed rate mortgage (FRM) with a 30-year term. Some form of mandated homeownership counseling generally comes with the deal.
Less common loan modifications include adding missed payments to the loan balance and extending the term of the loan. Least common is getting the lender to reduce the principal or wipe out any second mortgages.
A mortgage modification is not a refinanced mortgage -- a brand new loan written to pay off the old home loan.
Is a loan modification for you?
A loan modification may not be viable if:
- The modified loan comes with payments you still can't afford.
- Your current interest rate is already low and there's no room for the lender to lower it further.
- You can make the new payments, but the mortgage balance is greater than the value of your home and you don't plan on staying put long enough to reverse the loan-to-value imbalance.
- You have not already missed payments on your mortgage or can't show financial hardship due, say, to job loss, pay decrease, illness or interest rate increase.
- You have other properties, investments or assets that could be liquidated to cover your mortgage debt.
- A short sale (The lender forgives a portion of the debt owed if you can find a buyer), bankruptcy, auction sale, refinance or other approach, short of a foreclosure, is a better option.
Source: Broderick Perkins
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