Advantages and Disadvantages of a Mortgage Modification

A mortgage modification involves making changes to a loan agreement in order to improve affordability. President Obama introduced the Making Home Affordable (MHA) plan on 4 March 2009 with the intention of providing a viable foreclosure alternative for struggling homeowners.

What is a Mortgage Modification?

A loan modification consists of one or a combination of the following amendments to a mortgage agreement:

- An extension of the term of the loan.
- A reduction in the rate of interest.
- A change in the loan type. For example, switching from a repayment to an interest-only mortgage.
- A reduction in the principal.

Homeowners who qualify now have a foreclosure alternative; they will be able to receive help and assistance until January 31, 2012.

Advantages of Mortgage Modification

Negative equity. Homeowners may be forgiven some of the principal if underwater with negative equity.

Reduce interest payments. The rate of interest could be reduced to as low as 2.5%.

Lower monthly repayments. Writing-off some of the principal, reducing interest rates, changing mortgage type or extending the term can help to reduce house payments.

Foreclosure alternative. A loan modification provides a means of improving affordability and could help stop home foreclosure.

No publicity It is a private matter so only you and your lender will be aware of it.

Disadvantages of Modifying Your Mortgage

Qualification. In order to qualify under the Making Home Affordable (MHA) plan, a homeowner will need to comply with tough eligibility requirements. There is evidence that some have stopped making house payments in order to qualify for more favourable terms with a loan modification.

Credit score. Modifying a loan may negatively affect your FICO score. However, provided repayments are made punctually, this will start to improve after a few months. Also, the majority of qualifying homeowners have already defaulted on the terms of their agreement.

Failure rates. A recent Fitch Ratings study projected that up to 65% will become 60 days delinquent in less than 12 months.

Scams. The possibility of making money has attracted a number of companies that offer loan modification scams. However, government funded assistance may be available through organisations, such asnfcc.org.

Homeowners who are seeking a foreclosure alternative should seriously consider a mortgage modification. Other potential solutions include a short sale or filing for bankruptcy.


Relevant Articles:
What Foreclosure Alternatives are Available?
How the Mortgage Foreclosure Process Works

Disclaimer: This article in no way attempts to provide legal, financial or tax advice. One should consult a licensed attorney, tax advisor, or other qualified financial professional before proceeding.