Mortgage loans can present problems when interest rates rise or a borrower's ability to pay back the loan suffers because of a drop in household income. To avoid foreclosure and losing your home, you may want to consider a home loan modification. Also known as mortgage modification, this refers to a change in the terms of your existing mortgage that makes it easier for you to repay.
Pros and Cons
Mortgage modification benefits homeowners with certain types of mortgage problems. Home loan modification is for homeowners who expect to have the money in the near future to make a reasonable monthly payment. This means that loan modification won't work for the long-term unemployed or borrowers with permanently reduced incomes. It also won't do anything to increase the value of your home or your equity in it. However, if you can still afford your home, mortgage modification will allow you to keep your home without damaging your credit score or reducing the equity you have in your home.
Fees
If your mortgage costs you money in the form of late fees and administrative fees from the lender, you stand to save additional money from loan modification. According to the Department of Housing and Urban Development, Mortgagee Letter 2008-21 notes that lenders should waive their late fees during loan modification since the purpose of modification is to make it easier, not harder, for the borrower to pay back the loan.
Sources
There are several sources of home loan modification, each of which can describe the options available to you before you make a decision. The first place to look is your mortgage lender, which may be willing to offer loan modification directly. Private mortgage modification firms charge fees to negotiate with your lender on your behalf but may be able to secure a better deal than you could on your own. Finally, the federal government offers mortgage modification through its Making Housing Affordable program, which offers lenders insurance on the loans they modify to keep borrowers in their homes.
Alternatives
Home loan modification isn't the only way to deal with a problematic mortgage. Refinancing is another option for homeowners who have less severe trouble. Refinancing involves getting a new loan to replace the existing one, often at a lower interest rate or with more favorable terms. For example, refinancing can spread out the amount you owe over an additional 30 years rather than forcing you to pay it off in 10 or 20 years as your current mortgage requires. Another alternative to loan modification is foreclosure, which lenders may pursue if they expect not to be able to get back their investment even after offering modified loan terms.
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