What Is A Mortgage Modification?
A mortgage modification is restructuring your current loan with your lender to change the monthly mortgage payment to an affordable amount. This is your first line of defense when you have decided you want to stay in your home, but your current mortgage payments are no longer affordable. This could be due to an adjustable rate mortgage which went up, loss of income or any combination of factors.
How Does A Mortgage Modification Work?
A mortgage modification works by changing the loan terms with your lender. This is done by lowering the interest rate, loan extension, or in certain circumstances reducing the principal (amount owe) on the loan.
Mortgage Modification Scenario A: Lower Interest Rate
Let’s say you have a 30-year loan for $200,000 at 7.0% interest. Your monthly payments of principal and interest would be $1,330.60. Your lender agrees to lower your interest rate for a set number of years, normally two to three. For the next two years your lender lowers the interest rate 4.5%. This changes your monthly mortgage payment to $1,013.37, a savings of over $300.00/month for those two years.
Mortgage Modification Scenario B: Loan Extension
Your current loan is for $200,000 at 6.0% for 15 years. The monthly payments of principal and interest come to $1,687.71. If the lender agrees to extend the loan terms to a 30-year fixed rate loan, the same $200,000 loan at 6.0% is now a monthly payment of only $1,199.10 resulting in a savings of almost $500 a month!
Since you are never going to recoup any of the lost equity, you refuse to throw away good money after bad on this investment. The lender is threatened with foreclosure. It is a bold move and requires nerves of steel. You are telling the lender, “This house has gone down so much in value it is now worthless to me. I don’t care what happens to it. I am never going to get my money out of it with the current loan terms so you might as well just take it back. However, if you are willing to renegotiate this loan based on the properties current value, I am willing to stay.” Essentially, you are offering to buy the house back as if it has already gone into foreclosure but with new loan terms.
I have seen this strategy done successfully, but it is difficult to pull off. If you are successful in doing so, the end result is potentially having a house with principal and loan terms changed from a $200,000 mortgage at 7.0% for 30 years with a monthly payment of principal and interest of $1,330.60 to a $125,000 loan at 5.5% for 30 years with a monthly payment of principal and interest of $709.74. This is a savings to you of almost $700/month. Definitely a high risk, high reward mortgage modification strategy! If you want to know more about what is a mortgage modification, download our free DIY loan modification kit.
