An Overview of Loan Modification Program

An Overview of Loan Modification Program

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It is often seen that borrowers are not able to cope with the terms and conditions of the existing loan. Considering the inability of the borrowers to repay the loans, the creditors may decide to modify the loans with the aim to make it more favorable to the borrowers to repay the loan. Loan modification can be done through reducing the rate of interest on the loan, by increasing the loan term, sometimes even by reducing the principal amount and sometimes it may be any combination of the above three. Loan modification is an excellent way to avoid foreclosure. Lenders may find loan modification a better option than the borrowers opting for foreclosure as the cost of loan modification is less than the cost of foreclosure.

There can be a variety of reasons why you would like to opt for loan modification program. You may be facing hardship in repaying the adjustable rate mortgage loan that you have taken out because of high rate of interest. In that case you may want to switch to fixed rate mortgage loan with fixed rate of interest. If you are currently behind on making payments, i.e., if you are not making payments on a regular basis, the lender may think of modifying the loans. Again, if you owe more than your home is worth of, you can consider opting for loan modification program. You as a homeowner can apply for loan modification program on your own. Otherwise, you can also seek the help of a professional expert who is specialized in loan modification.

There are many benefits of opting for loan modification program. The benefits are listed below.

1. Preserves home ownership:
In the earlier days, when there was no loan modification program in place, many of the incapable borrowers had nothing to do but to face the verdict of foreclosure. It was akin to losing the ownership right in their homes. However, with loan modification program, the terms and conditions of the loans are made more favorable so that the borrowers are able to pay it. This helps them to preserve ownership in their homes.

2. Reduces interest rate:
In order to make the loan more affordable to you, the loan modification program sometimes reduce the rate of interest. However, the amount of reduction in the rate of interest depends upon the lenders. The rate of interest is generally reduced in the range of 3% to 7%. As a result of reduced rate of interest, monthly payment amount is also reduced.

3. Extends the term of the loan:
It is seen that some lenders prefer to extend the loan term and reduces the monthly mortgage payment amount. It eases the pressure of making high payments in the form of monthly mortgage amount. However, here you have to bear the pain of making payments for a longer period of time.

4. Reduces principal amount:
Even some lenders opt for reducing the principal loan amount. This is done so as to ease the burden of making monthly mortgage payments. If rate of interest is kept fixed, you can pay off the reduced principal amount within a shorter time period. Again, if the loan term is fixed, the monthly mortgage amount has to be reduced to accommodate the reduced principal amount.

Though, undeniably there are plenty of advantages of mortgage modification program, but it has some downsides too. It can inflict some negative impact on credit report and has serious tax implications. In the credit report of the borrower, there will be distinct signs that the borrower has opted for loan modification program. However, this will depend upon the lenders’ reporting to the credit bureaus.

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Categories: Home Financing

About Author

Krayton M Davis

Executive Manager: LetsRenovate Team