Loan Modifications Explained: Is It Worth the Risk?

Would you "plug" a tire with a piece of duct tape? You're probably thinking, what a stupid question! That wouldn't get you very far!

That's what doing a loan modification is like… a long shot of working, and even if it does… it won't get you very far. 

What is a Loan Modification?

So, what is a loan modification anyway?

It's when your lender changes or modifies the terms of your loan agreement due to financial hardship. This may be a change in interest rate, loan length, a different type of loan, or a combination of these. 

If you're like most people, you still don't know what the heck that means. So, let's break it down even more. 

The Loan Modification Process: What’s Involved?

The mortgage company will look at your current financial situation. They will ask you to fill out piles of paperwork. They want to make sure you are experiencing financial hardship, but they also want to make sure you can afford to pay modified terms, whatever those may be. It seems like a catch-22, right?

Interest Rate Modifications: What’s the Impact?

Okay, let's move to the next part… a change in interest rate. Depending on when you get your loan, you may have a very low interest rate, less than 4%. In this case, your interest rate would likely go up because today's interest rates are higher than 4%. If you have an interest rate that is higher than today's interest rates, your interest rate may go down. It could also stay the same. 

Loan Term Modifications: The Pros and Cons

Another thing that could change is the length of time of your mortgage. Most mortgages are 30 years old. Every so often, you will see one for 10 or 15, but these are less common—usually, the shorter your mortgage term, the higher your payment. During a loan modification, the mortgage company may consider making the loan term even longer to 40 years. This can make the payment even lower each month. This may seem like a good deal, but we will talk about what it means "behind the scenes" in just a minute. 

Lastly, there can be a combination of these happening. For example, you could see an increase in your interest rate and a longer loan term. 

Let's go back to what happens when you extend a loan term. The charts below show the difference between a 30-year note and a 40-year note at the same interest rate.

There is a 50 thousand-dollar difference you are paying in interest!

But the real catch is that additional interest is on top of all the interest you have already paid.

Essentially, you are starting your loan over again. 

This gets even worse if the interest is increased. Let's say you had a below 4% interest rate but do a loan modification and get today's rates and a longer term. Here is what that would look like.

Here you can see that it is just shy of 100 Thousand Dollars more that you would be paying over the lifetime of the loan. So you are basically paying DOUBLE! And this isn’t considering what you have already paid.

But the worst part of all is that there is a very low approval rate for loan modifications. Only 20% of people will be approved. Of that 20%, only 1 of every 3 people will keep the payments current instead of falling behind again.

When you consider all of this, you can see how trying to do a loan modification is the same thing as trying to plug a tire with duct tape.

Want to find out about what other options are available? Check out more information here.