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Modification: Lowering Your Payments

Unlike repayment plans and forbearance, mortgage modifications are designed to lower your monthly payments over the long term. You might be able to get a modification, but even if your lender is willing to make modifications in the right circumstances, don’t be too surprised if your attempt doesn’t yield much.

Judging from my conversations with many California clients facing foreclosure and what I’ve read about the foreclosure crisis nationwide, many homeowners can’t come close to making their current payments now or in the future. There are many reasons, including:

• Their income stream was disrupted by a layoff or injury and a new job at the same pay is just not available.
• They were in over their heads from the beginning, because of predatory loan practices or their own misstatements about their income and debt load.
• Their interest-only loans caused the principal to reach a preset cap, which in turn dramatically pushed their monthly payment upwards to an unaffordable level.
• Their interest rates reset higher (currently not as big a problem as was originally feared, due to falling short-term interest rates engineered in the first half of 2008 by the Federal Reserve). Or,
• Something happened in their life that required them to reprioritize their budget—for instance, a medical emergency or a child in trouble.

If you can’t afford your mortgage payment now, or won’t be able to in the near future, mortgage modification is the best approach to remaining in your house.

Here are some of the ways your lender might modify a mortgage to reduce your payments and perhaps to reduce the outstanding balance of your loan to the value of your home:

• Reduce your mortgage’s interest rate to the current market rate, if it’s lower than what you’re supposed to be paying now.
• Convert from a variable-rate to a fixed-rate mortgage, which could bring the payment down if the interest on the variable-rate mortgage has already reset, and will present a jump in payments if the reset looms in the near future.
• Extend the loan’s repayment period—for instance, from 30 years to 40. This will bring down the monthly payment, but delay for many years the time when you can begin to build equity.
• Reamortize the loan. This involves adding the amount of the missed payments to the principal balance and issuing a new loan at a new interest rate for a new period of time. Reamortization can result in an increased payment (for example, if the interest rate stays the same or increases) or a reduced one (for example, if the interest rate is reduced and the loan period is increased).