4 Types Of Loan Modification
4 Types Of Loan Modification
A loan modification is an alternative to foreclosure for thousands of struggling homeowners. There are several types of loan modification programs, so if you are considering applying for a loan modification it is important that you understand the different types of loan modifications to help you in your negotiation process.
Loan Modification #1 Straight Capitalization Loan Modification
With this type of loan modification, any back interest is added back with the loan principal. The new loan balance is amortized under the same conditions and loan terms of the current mortgage. With this type of loan modification the payments are actually higher than the original loan, so this type of loan modification is used to bring any delinquent interest current. In order to qualify for a straight capitalization loan modification the borrower would have to prove that they would be able meet the higher monthly payments.
Loan Modification #2 Loan Modification with Term Extension
This type of loan modification extends the loan term (how long you have to pay the loan off). This will result in lower monthly payments. With this type of loan modification, the term of the loan can only be extended to whatever the length of the original term was. So if the original loan was for 30 years, the term extension could extend for up to 30 years.
Loan Modification #3 Step Rate Loan Modification
With a step rate loan modification, the interest rate is adjusted instead of the term length to make the monthly payments more affordable. A step rate drops the interest rate by up to 3% for the first year and then rises back up until it returns to the original interest rate. A step rate loan modification gives a borrower in financial hardship some short-term relief by reducing the monthly payments for a few years.
Loan Modification #4 Reduced Rate Loan Modification
With a reduced rate loan modification the interest rate is lowered for the life of the loan rather than just temporarily like the step rate loan modification.
All of these types of loan modifications are designed to bring back payments owed on the loan current and to reduce monthly mortgage payments to help make a loan more affordable for a borrower facing financial hardship. Extending the term of the loan or lowering the interest rate are the two main methods used to achieve this. For some homeowners a lower monthly payment can mean the difference between losing their home and staying in their home and making more affordable mortgage payments.
