Loan Modifications: Helpful or Harmful?

Before the foreclosure rates started to reach an all-time high, many of you may not have even heard of a loan modification. Most mortgage borrowers think that establishing a mortgage is a binding contract (which it is) and that the only way to change your mortgage is to refinance it. For the most part this is true, but in extenuating circumstances and on a case-by-case basis you may be able to to modify your existing mortgage.

What is a loan modification?
A loan modification occurs when a lender agrees to modify an existing mortgage because a borrower can longer afford to pay on the mortgage. This is a long-term inability to pay because of an extenuating circumstance (loss of a job, huge interest rate and payment adjustment of an adjustable rate mortgage, death of the bread winner). A loan modification typically involves a decrease in the interest rate of the mortgage, a lower monthly payment, a change in the type of mortgage or an an extension in the term (or length) of the mortgage. A mortgage lender typically agrees to a loan modification because it's less expensive for them to modify the loan than it is to foreclose on the home.

It sounds good so far, right?

Where the Problems Creep In
While hundreds of thousands of homeowners heading down the foreclosure path have been saved by loan modifications, there are just as many that have been adversely affected by the loan modification process.

Some of the disadvantages that loan modification borrowers have experienced include higher mortgage payments and a higher balance due on the mortgage than before the modification. So how does this happen?

What many loan modification borrowers do not realize is that many lenders are rolling costs such as late fees, the amount of unpaid back taxes on the home and other administrative costs back into the balance of the mortgage. This is leaving some borrowers with a higher mortgage balance and monthly balance payment than before the modification, which is the direct opposite effect they were looking to achieve.

This is not always the case. There have been many borrowers that have come out ahead and saved their home with a loan modification. For example, 80% of the borrowers that modified their loans through Wells Fargo are now enjoying lower monthly mortgage payments than they were before the modification took place. At Citimortgage, 92% of its loan modification customers have benefited from a loan modification.

The moral of the story is that it could go either way. Mortgage modification is not the panacea to the foreclosure problem. You need to speak with your lender and make sure that you fully understand all of the terms, conditions and fees associated with a loan modification to make sure it puts you on the beneficial side of the equation.