A loan modification, also known as a mortgage modification, is utilized typically in efforts to avoid a foreclosure. The Obama Administration specifically has given incentives in the form of financial perks to lenders who opt to use a mortgage modification instead of foreclosing a home. The system as it exists normally often times will be better for lenders in a financial sense to foreclose on a home rather than look to alternatives to save a home. A foreclosure of course is very bad for a borrowers credit and bad for the communities property values that surround a foreclosed home
A loan modification can lower the interest rates, often by extending the length in which the payments have to be made and sometimes reducing the overall amount that needs to be paid.
Many of the problems that lead to home loan modification necessities have nothing to do with the home owners decisions. Due to the dropping of property values in these difficult economic times, families have started seeing their their primary investments worth drop. This fact coupled with adjustable rate mortgages (ARM) that have spiraled out-of-control and monthly mortgage payments are tough to pay for many due to the unemployment rate, many are left searching for solutions in hopes to avoid foreclosure.
Mortgages are modified to the benefit of the borrower in a number of ways including:
- Reduction in late fees or other penalties
- Reduction in interest rate, or a change from a floating to a fixed rate, or in how the floating rate is computed
- Lengthening of the loan term
- Reduction in principal
- Capping the monthly payment to a percentage of household incom
