With more homeowners struggling to make timely mortgage payments, loan modifications are a hot topic in the mortgage world right now. If you are considering trying to have your mortgage modified in hopes of regaining your financial footing, you should understand the differences between the common loan modification options.

Extension of Term: This modification strategy extends the period of time that the borrower has been given to repay the loan. For instance, a homeowner with a 15 year mortgage could reduce their monthly payment by adjusting to a 30 year mortgage. With a more manageable monthly payment, some borrowers would be able to keep their homes even though they’d pay a lot more interest in the long run.

Capitalization of Arrears: This modification takes the amount of money that you are currently late in paying and packs it back into your overall loan balance. You can think of it as a fresh start for a borrower. The monthly payment amount stays the same, and the borrower is given a clean slate. This is by far the most common modification program. You should be aware that any late fees and charges that you’ve accumulated will also usually be built into the loan balance.

Interest Rate Freeze: This applies to adjustable rate mortgages that require borrowers to increase monthly payments as the rate increases. A freeze temporarily keeps the interest rate from increasing; giving the borrower a chance to keep monthly payments from increasing while finding a better long term loan solution. This freeze can be temporary or permanent.

Loan Balance Reduction: This program is exactly what it sounds like-the reduction of the overall amount owed. If instead of owing $300,000 on your home, your lender wrote off $50,000 and you owed only $250,000, your monthly payment would decline significantly. Some lenders use this strategy to keep people from being so far underwater in their homes that they give up and default on the entire loan.

There is no magic bullet in mortgage modification programs, and recent data shows that most borrowers who have their loans modified are in trouble again within 6 months. But some of these strategies are realistic, helpful options that can keep homeowners from losing homes that they are currently struggling to pay for.

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Tags: default, foreclosure, mortgage adjustment, Mortgage modification

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