4 Myths about Loan Modifications

Loan modifications allow you to reorganize your home loan in order to find better terms. Some borrowers need these options to gain lower monthly payments if they can no longer afford their current debt. Others will look to modification to raise their payments and pay off their homes sooner. In both cases, there are a number of misunderstandings about the process.

#1 Federal Modifications are widely available

The FHA federal loan refinance program is the cheapest option to refinance your mortgage with the lowest amount of penalties in most cases. Unfortunately, this option is only available to a limited amount of people. You must have a subprime mortgage that is adjusting to a high interest rate. You must show you could afford your mortgage before and could afford it in the future if it does not adjust to this high rate. If these factors are true, then you may be eligible to refinance to a low, fixed rate through the FHA program.

#2 Modifications are always Possible

Lenders do not like to modify loans for you. Most lenders will be happy with the terms they have already set as long as you are paying on time. Modifying these terms takes time, and it is possible the lender will lose some potential profit over the life of the loan if it is modified. You will have to apply for modification with your lender. If you are not approved, the alternatives to change the loan, such as taking out a new mortgage to pay off the first, are even costlier.

#3 Modifications Save Money

There are two possible goals with modification: the first is to reduce the overall cost of the loan, and the second is to reduce the monthly payments. If your goal is to save money over time, you will have to monitor the process very carefully to make sure this happens. The lender will charge you a fee to modify. They may also knock your credit a few points, which can raise rates on any variable rate loans you may have.

If you are modifying for the second reason, to lower monthly payments, then you need to be aware of the potential downsides in the long-run. You will spend much more over the life of the loan, have more debt to your name for a longer period of time, and see delays in when you actually own the house.

#4 Modifications Do Not Affect Credit

As mentioned above, your lender will knock your credit if you modify. The difference may be small in a direct modification. It is also possible you are not looking to take another loan for years, so the change will not affect you. If you do happen to use a third party loan to prepay your existing home loan, you will find the affect on your credit is greater. The original lender will flag your credit report with the credit bureaus. Future lenders will see you have broken a contract in the past. This can scare lenders away from issuing home loans to you in the future.