According to Investopedia, a Forbes Digital Company announced as the top investors modules of 2008, a loan modification is “a modification to an existing loan made by a lender in response to a borrower’s long-term inability to repay the loan.” A loan modification mostly involves reducing the interest rate of a loan. The interest rates of loans are usually the downfall to the high number of unpaid loans. There can also be an extension to the length of the term loan. A loan may be termed to last for 12 months, a loan modification will allow them to move to 18 months. This will change the amount due each month to a lower payment, or it will just add more interest and more payments. The last way it can be modified is if you get a different loan with different terms and agreements. You may also get a combination of the three.
A loan modification is different from other loans. This is an agreement for a long-term solution for the borrowers who will never be able to repay an existing loan. Basically, for homeowners who have taken out a loan for a house will sometimes apply for a loan modification. This will give them a monthly payment, like paying rent on an apartment, so that they will be able to keep their house. Many times, the homes are willed to a close relative, friend, or child. They will then take over payments and in their lifetime, the home may be paid off. To understand how a loan modification work, here is an example of a homeowners road to home ownership.
Lets say Susie saw a house she wanted to buy. The house was on the market for $190,000 with a 2% tax on the land each year. That would mean her taxes every year would be $3,800. She went to a loan agent and applied for a loan. She was approved for $192,000. You will never get the full asking price because they want you to pay the closing cost, insurance, and taxes. This gives the loan agency assurance that are able to pay something. She paid for the closing cost, insurance, tax, and inspection and was able to move in. The loan was 50 years, monthly payments were .02% of the total price which is $192,000 times .02 which is $3840, and the interest rate was .09 of the asking price which is $9600. So over the course of 50 years, she would have paid $201,600 for the house. Now, sometimes, it happens, people get in over their heads and she can’t afford this. She would go to her loan agent and ask for a loan modification. Some agencies require that you apply for a loan modification. You would ask to either reduce the interest rate, the monthly payments, or the term agreement. When you reduce the interest rate, they will spread the interest payment across the 50 years and after payment is done, you will still have the interest to pay on the house. The interest is deemed the same legal standing as your monthly payment. If you fall behind, even if your house is paid for, they can still put a lean on the house for unpaid interest rates. Taxes are paid every year, rather you have finished payments on the house or you own. There are land tax, school zone taxes, and other financial burdens with owning a home.
Basically, a loan modification is just another payment method that is supposed to help you prepare for owning homes and staying out of debt.