There are several ways in which a loan modification can lower monthly mortgage payments. A loan modification is an agreement between borrower and lender to change the original terms of a mortgage contract. In most cases, the loan modification is awarded to borrowers facing foreclosure, and the loan modification is intended to help the borrower avoid foreclosure by making monthly mortgage payments more affordable. In order to make the loan more affordable, and as the name suggests, certain parts of the original loan contract will have to be modified. That modification can occur any one of the following ways:
Interest Payment Adjustment: By altering the original interest payment requested by the lender, monthly mortgage payments can be greatly reduced. Since interest rates have to be paid off within the length of the loan, a higher interest rate requires more money to be dispersed over the same amount of time. Since the length of the loan can’t change, the amount of payments due each month has to be increased in order to collect all of the interest on time. Lowering the interest rate by as little as half a percent can create just the right amount of savings for many borrowers.
Loan Length Adjustment: When a lender is willing to increase the amount of time they will have to accept the risk of a loan for, they will often consider increasing the length of the loan to as much as 40 years. When time is added to the loan, the remaining balance of the loan can be dispersed over more time, thereby decreasing monthly payments. The amount of time that will be added to a loan will be determined by how much assistance the borrower is requesting. For example, a person who only needs to decrease their monthly mortgage payment by $100 in order to get out of debt may only require a few years or so to be added to their loan.
Forgiveness: If a borrower ever falls into default, they likely rack up fees that will increase the size of their loan. For each day that a borrower is in default, they risk having more fees added to their account until the account is up to date. This can spell trouble for the borrower trying to climb out of debt who misses a mortgage payment. The amount of the missed payment, late fees, and interest for each day the loan is late, are all bundled together and attached to the loan principal. When a lender agrees to modify a loan, they may agree to forgive certain fees, thereby lowering the loan principal, and making monthly mortgage payments more affordable.
Any Combination of the Above: There is nothing that says only one of the above mentioned tactics has to be used. Lenders and borrowers can modify as many terms as both parties agree to. Borrowers should try their hardest to have their borrowers modify as many terms as possible. Each contract term that is modified is a few more dollars back into the borrower’s pocket each month. With a few bucks saved each month, the borrower can save up enough money to begin climbing out of debt and slowly release the grip of their debt and lenders. Borrowers are urged never to attempt a negotiation with a lender without legal assistance. The process is too delicate to undertake without any experience.
Borrowers who are facing foreclosure have too much on the line to attempt a loan modification negotiation without any experience. Hiring an attorney may be the best investment in a loan modification that a borrower can make.