What Is A Home Loan Modification

Home loan modification, or mortgage modification are words that are heard a lot lately in the media, in the kitchen and in the office. More and more people are having a struggle to pay their home loans and are looking for a way of lowering their monthly mortgage payments. Others have heard that interest rates have dropped (they have, and a lot) and want to know if they can also save on their monthly expenses, nobody likes to pay more than they have to, right?

But when asked what a loan modification is exactly, many are unsure. In fact some rather surprising definitions have come up linking loan modifications with bailouts, foreclosure and other banking terms that although sometimes related are by no means synonyms.
So what is a loan modification? A loan modification is a permanent change to one or more terms in a loan or mortgage contract. Often loan modifications occur when the borrower cannot afford the mortgage payments due to a rise in interest rates or a loss of income. The loan modification allows the loan to be reinstated avoiding foreclosure of the mortgage, which is bad news for both the borrower and the lender. The loan modification makes the loan affordable for the borrower that can continue to pay the home loan.

Of course loan modifications do not only occur when the borrower is in financial difficulties it can also be used as a way of finding a cheaper loan or as a marketing tool by banks who want to attract more customers.

Whether you are looking for a home loan modification because of financial strife or because you want a better mortgage there are three main ways you can modify your loan. These loan modifications are often combined to create a loan modification the lender and borrower can agree on.

Lower interest rates.
This is often the selling point of a new borrower offering to buy your mortgage and sell it back to you at a lower interest rate. This is the best kind of loan modification for a borrower because it lowers your monthly expenses and the overall cost of the mortgage.

Longer loan tenure.
This means that the lender “allows” the borrower to take longer to pay the loan. This can be good for the borrower because it reduces the monthly cost of the loan. However it has the effect of increasing the amount of interest the borrower pays.

Larger loan.
This is a home loan modification banks love. Increasing the home loan can be a great way of paying for other debts and consolidating them in one big loan. This can be a good idea for borrowers that are paying high interest rates for other debts like credit cards or car loans and would prefer to include it in their lower interest mortgage payments.