The term "Loan Modification" is one that is being used often and repeatedly in the news and society today. In spite of its prevalent use, many people are not sure of what a loan modification is exactly. Sure, it is a "modification" of a "loan," but beyond that, how can you tell if a Loan Mod, as it is often called, is right for you?
First, you have to know what it is. A Loan Mod is basically an alteration of the existing terms of a loan. These terms can include the amount / due date of monthly payments, the interest rate, term or duration of payments on the loan. Any alteration that takes place, however, can only be done with the approval of the Lender. This process of working with the lender to alter the terms of the loan usually comes about when a person can not longer afford to timely make the payments on the loan. Often, engaging in and completing a loan modification can save a borrower from defaulting on a loan.
A vast majority of borrowers that are currently seeking Loan Mods are borrowers who have ARMs. ARMs are Adjustable Rate Mortgages, meaning that they are mortgages that do not have a fixed interest rate but one that varies. A major difficulty that borrowers often face when they are in ARMs is that because the interest rate is variable, meaning that it changes, the amount of the monthly payments a borrower is required to make, changes as well.
A Loan Mod is a good option for a borrower who: a) does not want to experience any negative tax consequences and b) does not want to have negative marks on his / her credit report. While there are other means of modifying the terms of a mortgage (ie forbearance, or short sale), a Loan Mod will enable a borrower to keep his / her home while making a reduced payment. A Loan Mod is an excellent way to avoid foreclosure.