You’ve likely heard about loan modification while reading a magazine, blog post, or guide. Regardless of where you first encountered the term, you may be wondering what it actually means and whether or not there’s any benefit to loan modification. Well, we’re going to explain all that and more in this post. There are different approaches that one can take with a loan modification. A common type is where the term is extended in order to reduce the mortgage payments.

If you’re having difficulties making your mortgage payments or want to take advantage of a reduced interest rate, you may wish to refinance your loan. However, you may want to apply to your lender for a loan adjustment. Both refinances and loan modifications have advantages and disadvantages. Before making a decision, it is critical to conduct research.

Let’s look at some of the key distinctions between refinances and loan modifications. We’ll show you when a change is preferable to a refinance – and vice versa. Finally, we’ll walk you through the application process for both.

What Exactly Is A Loan Modification?

A loan modification is a revision to your mortgage loan’s original terms. A loan modification, unlike a refinance, does not pay off your current mortgage and replace it with a new one. Instead, it directly alters the terms of your loan.

It’s also vital to understand that credit modification programs might have a negative impact on your credit score. If you’re current on your mortgage, it’s a good idea to look into your alternatives and see if you can refinance.

Because the terms must be approved by your present lender, you can only request a loan modification through them. Some of the things that a modification may change are:

Loan term extensions: If you’re having difficulty making your monthly payments, you may be eligible to amend your loan and prolong the term. This provides you additional time to repay your debt while also lowering the amount you must pay each month.

Reduced interest rates: If interest rates are lower now than when you locked in your mortgage loan, you may be able to alter it and get a cheaper rate. This usually results in a lower monthly payment.

Loan structure changes: You may be able to convert your adjustable-rate loan to a fixed-rate loan. This can be advantageous if you are currently living on a fixed income and require a more regular monthly payment.

Principal forbearance: Your lender may agree to set aside a portion of your principal balance to be repaid later. This can assist in lowering payments and/or making your mortgage more reasonable. These alterations, however, are uncommon. Principal forbearance is normally available only if no other option can help you avoid foreclosure. To qualify for principal forbearance, you must normally also be enrolled in a repayment plan. A repayment plan allows your lender to determine if you will be able to keep up with your new installments. After you finish the repayment plan trial term, your lender may offer to settle some of your principal.

Lenders are under no obligation to approve your modification request or to renegotiate your principal. This means that obtaining a modification is frequently more complicated than obtaining a refinance. You’ll need to provide proof of hardship. When it comes to who qualifies for a modification and what types of modifications are available, each lender and investor in the loan (such as Fannie Mae, Freddie Mac, FHA, and others) has their own set of rules.

If you are behind on your mortgage payments, you may receive offers from settlement companies to assist you in obtaining a loan modification. These companies will negotiate with your lender on your behalf and can help you achieve a loan modification. It is crucial to remember, however, that these companies frequently act as middlemen, charging you for a service that your loan servicer will give for free.

If you do decide to cooperate with one of these companies, do your homework before signing any contracts. If you’re already behind on your mortgage payments, the last thing you need is a high-fee contract with a settlement business. If something appears to be too good to be true, it most likely is.

That being said, it isn’t the best way to go if you’re trying to pay your home loan off faster. It’s worth noting that loan modifications won’t reduce your principal balance — the total amount owed — but they can still reduce your interest rate which will make it easier to pay the debt off. There are some banks that will actually raise your interest rate if you go for a loan modification so it’s essential that you know what you’re doing before attempting this. Short sales can’t be processed at the same time as a loan modification so you’ll have to pick one or the other. That’s all for now but we hope that this post has helped you out!