Loan Modification
AdvancedA loan modification is a permanent change to the terms of an existing loan, such as lowering the interest rate, extending the repayment period or reducing the balance, agreed between the lender and a borrower who is struggling to make payments.
Loan modifications are most common with mortgages. Instead of foreclosing on a property, which is costly for lenders, they may agree to change the loan so that the borrower can afford the payments.
Modifications can include reducing the interest rate, extending the term, for example from 20 remaining years to 30, adding missed payments to the loan balance, switching from a variable to a fixed rate or, less commonly, reducing the principal.
For example, a homeowner who has lost income might have their monthly mortgage payment reduced from 1,500 to 1,100 by lowering the interest rate and extending the term.
Loan modification differs from forbearance, which is a temporary pause or reduction in payments. A modification may lower monthly payments but increase the total interest paid over the life of the loan, and it may affect the borrower's credit record. Borrowers should be cautious of companies charging fees to arrange modifications, since lenders and non-profit counsellors can help for free.
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