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What
is a Loan Modification?
A loan modification is a tool used to avoid a foreclosure
case. When a borrower can no longer afford the payments
due under the original loan, the borrower and lender
may negotiate to modify the terms of the original loan.
If the lender would incur a substantial loss should
they proceed with a foreclosure, the lender may be willing
to negotiate to modify the loan and sustain a small
loss rather than the loss they would incur in the event
of a foreclosure. Loan modifications are especially common
when the property which secures the loan has decreased
in value below the amount that is owed on the mortgage
and even after a foreclosure the lender would not recover
the full amount owed. A modification is a permanent
change in the terms of the loan and usually takes one
of four forms:
• Reduction
of the Interest Rate
The most common modification negotiated between
lenders and borrowers is a reduction in the loans
interest rate and/or a conversion of a variable rate
loan into a fixed rate loan.
• Extension
of the Loan Payment Period
Lenders may allow for a modification which will extend
the period over which the principle is repaid in order
to lower the monthly payments. Extending the loan
payment period results in a total higher interest
being paid over the life of the loan, as well as a
slower accumulation of equity in the home.
• Re-amortization
with Capitalization of Arrears
A lender may allow for missed payments to be added
back to the principal amount of the loan. The loan
will then be recalculated using the same interest
rate and time period as before. This will cause a
slight increase in payments, but it will cancel the
arrears. If reamortization can be combined with any
other forms of loan modification, payments can be
reduced considerably.
• Reduction
of the Principle Balance
If the loan amount is higher than the value of the property,
due to reasons out of the borrower’s control,
a lender may consider reducing the principal. They may
also reduce the principal amount if they realize that
the only other option is foreclosure in which they will
obtain the current value of the property minus costs.
If the principal is reduced, this will of course lower
the payment. Some lenders will choose to lower the principal
in the event that they are allowed to keep deferred
junior mortgages in the amount of the reduction. This
secures the lender in the event that the property goes
up in value. These junior mortgages generally only require
payment in the event that the property is sold.
At Yesner &
Boss, P.L. we can help you modify your existing
home mortgage with your current lender and we can also
negotiate new terms on your behalf. Modifications are
made when borrowers can no longer make their monthly
mortgage payments due to financial hardship or an increase
in the loan payment.. Based on your current financial
situation and hardships we are able to facilitate the
change of your interest rate, loan term and your loan
payment enabling you to stay in your home, while bringing
your loan current, and saving you money.
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