What Types of Loan Modifications Exist?
5 Ways Lenders can Modify your Loan
Banks can change the terms of your loan to make the payments more affordable. These changes are often called loan modifications, and they may be permanent or temporary. We'll discuss the specific changes that might happen here. For an overview of modifications, including how to request one from your lender, see What is a Loan Modification?
Types of Loan Modifications
A loan can be changed in several ways.
The ultimate goal is to make it easier for you to continue making payments and stay in the house (and, most importantly, avoid foreclosure).
Some of these options are better than others - think about which ones would benefit you the most so that you're prepared when you talk with your lender. Lenders won't always offer all of these options, and you might need to negotiate and keep asking to get the most beneficial results (such as principal reduction) - if those options are even available to you.
Postpone payments: in some cases, you can simply skip a few loan payments, which offers short-term relief from short-term problems. If you're in-between jobs (with certainty of a paycheck on the horizon) or you've got a few medical bills to pay, this might be a good option. You'll have to make up those payments at some point though. Your lender will add those missed payments to the end of your loan, which means it will take a few extra months to pay off the debt.
What's more, you'll pay more in interest with this option.
Principal reduction: the most attractive option is to have your lender reduce the total amount of your loan. In simple terms, you'd owe less on your loan, and you'd get a new monthly payment based on your smaller loan amount. This solution is rarely available (but it's always worth a try) because lenders are typically unable or reluctant to forgive debt.
If you are fortunate enough to have this opportunity, discuss the implications with a tax advisor before you move forward.
Rate reduction: if your lender reduces the interest rate charged (APR) on your loan, your monthly payments will also go down. A rate cut might only be temporary, so be sure to read the details of your agreement and plan ahead.
Longer term: your lender might also extend the loan term or the number of years you have to pay off the loan. The longer you pay, the lower your payments become. However, you'll pay more in interest because you're keeping the debt around longer. See below for tips to find out exactly how much more you'd pay.
Refinance the loan: you might be able to swap the loan out for a different loan. For example, you'd pay off the existing loan, and replace it with a loan that comes with a lower interest rate and longer repayment period (which would result in lower monthly payments). Again, this can lead to higher interest costs over the life of the loan, and closing costs for refinancing can be expensive.
To see how changes in the interest rate, term, and principal amount affect your monthly payment, see our Loan Amortization Calculator.