What is a loan modification, and how will it help me with my mortgage?

A loan modification occurs when a homeowner enters into an agreement with his or her mortgage loan servicer to change the terms of the mortgage. The goal of a loan modification is to lower monthly mortgage payments to a level that homeowners can better afford, thus decreasing the risk of foreclosure. Typically, loan modification programs are targeted at homeowners whose ability to afford their current mortgage payment has declined, either due to job loss, increased interest rates, decreased home values, or other similar circumstances.

The exact provisions of loan modifications vary among loan servicers. For instance, some programs may reduce your payments and/or interest rate on your loan for a certain period of time. Other programs may make permanent modifications to your loan. Again, different loan servicers may have different loan modification programs, so you’ll need to check with your loan servicer in order to find out the terms of any available loan modification programs, or other programs designed to help you stay in your home.

Under the Homeowner Affordability and Stability Plan, loan modification will lower your monthly mortgage payment to an interest rate that is not more than approximately 31% of your monthly gross income. You will be given a trial period of three months under the new interest rate, and a new monthly payment schedule. If you are successful in making your payments during the trial period, you can enter into a loan modification that lasts five years. After five years, your interest rate will go up again at a rate of no more than 1% per year; however, your interest rate will never be higher than the current market interest rate on the date that you entered into the loan modification agreement with your loan servicer.

Furthermore, if reducing the interest rate on your mortgage loan is not enough to bring your monthly payment below 31% of your gross monthly income, then your loan servicer can use other options to reduce your monthly payments to that level. For instance, your loan servicer could forgive part of the principal balance of your loan, defer part of the balance, to be paid at a later date, and /or extend the repayment period on your loan for up to 40 years.

Will refinancing my mortgage under the Home Affordable Refinance Program, or other programs, reduce the amount that I owe on my loan?

Refinancing your mortgage under the Home Affordable Refinance Program will not reduce the amount you owe on the mortgage. The objective of the Home Affordable Refinance is to help borrowers get into more affordable loans. Refinancing will not reduce the principal amount you owe to the first mortgage holder or any other debt you owe. However, refinancing should save you money by reducing the amount of interest that you pay over the life of the loan.

If you refinance your loan in connection with a loan modification, however, you may be able to obtain a principal reduction on your mortgage.

The information on this page is meant to provide a general overview of the law. The laws in your state and/or city may deviate significantly from those described here. If you have specific questions related to your situation you should speak with a local attorney.