How Mortgage Modification Affects Your Home Equity Line

Mortgage modification changes the terms of your home loan. It is requested when you face hard times. Mortgage modification is an agreement between you, the borrower, and the lender to renegotiate your mortgage in order to avoid bankruptcy or foreclosure. Whether your interest rate is lowered, your monthly payments are forgiven, or the term of your loan is extended, mortgage modification does not raise the overall value of your loan.  If anything, mortgage modification will decrease the value of your loan. A home equity line is a line of credit given to a borrower from a lender. It is determined through analyzing the value of your home and the value of your mortgage. It is used as a source of income to make large purchases such as additions to a home. The relationship between mortgage modification and a home equity line of credit is direct and related.

The Connection

To determine the amount of credit that you will receive through a home equity line, a lender will take a percentage of the appraised value of your home.  This percentage is the credit limit that your lender is giving to you. The higher the percentage, the more money the lender trusts you with. Once the lender determines this percentage, he or she subtracts from it the amount that you still have left to pay on your mortgage. This final number is the amount of money that you can use to purchase goods, take out another loan, or make any other big item buy.

If you have used mortgage modification, you have extended the term of your loan. You will have more to pay on your mortgage for a longer period of time because you are paying less every month. Mathematically this means that you will need to subtract a larger amount from your credit limit in the equity line equation. Your home equity line of credit will decrease.

Another reason that mortgage modification will lead to a decrease in your home equity line of credit is because once you default on a payment you are considered a higher risk by the lender. The percentage of your home's appraised value that the lender is willing to loan to you will decrease because, as the recipient of a mortgage modification, you are more likely to default on the loan. The lender will not want to take you on as a customer is he/she cannot depend on you paying him/her back.