Top 4 Loan Modification Types
For countless families across the country loan modifications is becoming an popular
alternative to losing their houses due to foreclosure from the bank. The task of finding a program that works for people's specific needs can be a challenging one though. There are several
loan modification types to choose from, so if one is considering applying for a loan modification it is important that one understands what sets each modification apart from one another.
Reduction of Principal Balance:
If the actual balance of the loan can be reduced then in turn the monthly payments will be reduced. Which is actually a win win situation for the borrower yet a big loss for the investor. The only thing that make this worthwhile for the investor is that it reduces the borrower's negative equity, which increases the borrower's incentive to do everything possible to keep the house. If one could get their investor to allow this
loan modification type then this will be a permanent reduction as opposed to a temporary interest rate reduction. Clearly a great option for the average household who needs assistance.
Interest Rate Reduction:
This loan modification type is second best for the borrower whereas the investor still seems to take most of the bullet. By reducing the interest rate as opposed to simply just extending the life of the loan one can see much more significant month to month payment reductions, which is what after all the common household is having trouble with. The rates are reduced on an individual basis. The hope is that the borrowers will be able to eventually pick back up with the original rate of interest in a set period of time, say 5 years or so.
Extension of the Term (Life) Loan:
This loan modification type extends the life of the loan resulting in lower monthly payments for the borrower. If the life of the original loan was say 30 years then that is the maximum that one can extend the new loan modification to. This method while a great idea in theory will not reduce the monthly payments that much if the loan is only within its first few years.
Capitalization of Arrears:
The investor will commonly take all of the previous late charges, missed payments, and other miscellaneous charges that were accrued and add them to the balance of the loan. This will in turn actually make the payment higher which is not usually the most helpful for the household in a financial crisis. Yet, this loan modification type can show merit for the borrower who is otherwise always on time with payments but recently has hit a temporary economic slump. By modifying this way he can bring his loan current and in good standing with the investor.
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Top 4 Loan Modification Types
By: John Hughes
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