In the past, if a person got behind on their mortgage payments, they had very few options. Either they could try to increase their income, get another loan at a higher rate, try to refinance, or they could sell the home. Without these options, inescapable foreclosure hung over them.

Thankfully today a new option is available that makes all kinds of sense (and cents!). This is called Loan Modification. We’re going to take some time to help you understand just what a loan modification is and how it can help you.

To begin with, let’s just make sure we understand what foreclosure is. When we borrow money fromthe bank, we are essentially agreeing to a contract where the financial institution buys the house for us and we pay the bank an agreed upon amount, with agreed upon interest, until the cost of the home is paid back. In other words this means that the financial institution actually owns the home.

What this also means, less obviously, is that your house is not always an asset. If you have a large chunk of equity payments each month, the house is sort of an asset. However, if you are in a risky loan with difficult payments and a depreciating home, your house is a massive liability.

Truth is: your house is only an asset if it is paid off. The best definition and distinction between an asset and a liability may seem to simple,but it will help you understand if your house is an asset or liability to you right now. An asset puts money into your pocket. A liability takes money out of your pocket. Since most people don’t make money off their house, it is a liability and they are paying money out of their pocket every month to the bank. You home is actually an asset to your bank because they own your home and are putting money in their pocket each month from you.

So back to foreclosure. Foreclosure is when the lender decides the borrower is not going to be able to continue to faithfully pay on the loan, probably due to a history of non-payment, and the lender says the loan is in default and that they are going to repossess the home. The bank is able to repossess the house because they are actually the real owners of the home.

Because we comprehend foreclose, we can move on to loan modifications.

Loan Modifications: The What

A loan modification is exactly what it sounds like: a change to your loan agreement. This change can come in a variety of forms, which we will cover momentarily, but it is simply a change to your existing loan agreement.

A loan modification is not a refinance. It is not a home equity line of credit. It is not an unsecured loan.

When you get a loan modification, you stay in the same loan that you already have, but some of the terms of the agreement change. The main point of a loan modification is to have a lower, more affordable payment on the loan that you already have with a lender. We will talk about why a lender would be willing to make these changes in the next section, but suffice it to say, loan modifications are not pipe dreams. They are real and they can make a substantial difference in your monthly budget.

Now, as we’ve mentioned, a loan modification changes a term, or terms, of your existing loan. Here is a list of the most common terms that you may be able to change through loan modification:

* Interest rate reduction.
* Extending the loan payback period This is know as being upside down.

Again, the purpose of changing these loan terms is to reduce your monthly payment to something you can afford. Now let’s discuss WHY a lender would even consider modifying your loan by clicking here modify your home loan or here loan modification.

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Mark

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