Mortgage loan modifications help homeowners stay in their homes by restructuring existing mortgages to reduce monthly payments. Although mortgage modification loans are valuable to borrowers, lenders benefit from them as well. Foreclosure is a costly process and lenders can lose money on homes whose market value has declined below the loan value.
Several types of mortgage modifications are available. Check with your lender or loan servicer to determine which options are available for you.
Capitalization of Arrears
If you have missed a mortgage payment, you are considered to be in arrears or delinquent. When a mortgage loan is modified, lenders can capitalize these arrears by rolling them into the principal of your loan. This process makes you current on your loan payments, and no longer in arrears or delinquent. Capitalization of arrears stops calls from payment collectors and is a good mortgage modification solution if your payment problems are temporary and you will be able to begin making your regular monthly payment again immediately.
Lenders may also grant a mortgage loan modification by reducing the interest rate on your loan. According to a March 2009 article in the Los Angeles Times, interest rate modifications can be short-term or for the life of your mortgage. A short-term interest rate reduction lowers your monthly payments for a limited period of time. Once the rate reduction period has expired, your interest rate will revert to the original rate in your mortgage contract. The idea is that the lower payments will allow you to keep your home, get back on your feet financially, and start paying your regular mortgage payments when the rate reduction ends.
An interest rate reduction that lasts for the life of your mortgage will reduce your payments until the mortgage is repaid in full. This option is usually only open to people whose payment abilities are not expected to return to full capacity in the future.
A term extension lowers your payments by giving you additional time to repay your mortgage. For example, if you currently owe $100,000 and have 15 years remaining on your mortgage, a term extension would allow you repay the $100,000 over 20 or 30 years. You will pay more interest over the life of your loan under this type of mortgage modification, but your monthly payment amount will be more manageable, allowing you to stay in your home.
The Making Home Affordable website defines principal forbearance as moving a portion of the principal of your loan to the end of your mortgage contract. Your new payment will be lower and based on the mortgage loan amount less the amount of the principal forbearance. An added advantage is that the principal forbearance amount does not accrue interest over the life of the loan, but it will be due when you pay off or refinance your loan.
- Los Angeles Times: A Consumer’s Guide to Mortgage Modifications
- Making Home Affordable: Borrower Frequently Asked Questions
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