Mortgage Modification - How and Why Lenders Lower Monthly Mortgage Payments by Restructuring Loans

You may have heard that homeowners have been able to lower their monthly mortgage payment by obtaining a restructured mortgage from their lender. This is a process called loan modification. This hub will explain how and why lenders are able and willing to lower your monthly mortgage payment by restructuring the payment terms of your home loan.

Restructuring a mortgage to lower a homeowner's monthly mortgage payment is a mortgage solution providing debt help and mortgage assistance to distressed borrowers in mortgage default.

Lenders are willing to modify mortgage agreements because doing so allows them to potentially save the functionality of a non performing investment or mortgage loan. This implies that lenders will only restructure a loan if they believe that the loan will not or can not be repaid as originally agreed.

Loan modification is a loss mitigation tool used to help homeowners in financial hardship.

Homeowners are able to obtain a lower monthly mortgage payment through loan modification. But how exactly does modification do this?

Modification restructures the payment variables such as interest rate, schedule, term, fees, and the actual principal balance of the mortgage loan. Below we have highlighted the most common ways lenders reduce loan payments.

• Interest Rate- The most common mortgage payment variable restructured is the interest rate. Just a small rate decrease can mean incredible savings for a homeowner. For example a 1% decrease on a 240,000.00 dollar mortgage will save the homeowner 2,400 dollars in interest during the first year alone. Lenders tend to favor lowering the interest rate because it looks better on the books and no loss has to be recorded or reported.
• Term- The term of the mortgage or payment schedule is another very common mortgage payment variable that lenders adjust in order to lower the homeowners loan payment. By increasing the time that the loan must be paid back the number of scheduled payments increase. By increasing the number of loan payments the actual amount of each loan payment is decreased. Lenders prefer term adjustments over alternative adjustments such as principal balance reductions because they do not have to incur a reported loss on the loan. Though the risk and annual cash flow will be reduced the total amount collected on the loan will actually increase because the compound interest has more time to accumulate.
• Principal Balance- When lenders are unable to achieve the payment reduction targeted on a mortgage modification through the term and interest variables they will often elect to reduce the principle balance owed on the home loan. By doing this less principal needs to be paid back and less interest is accumulated over time. This in turn will reduce the mortgage payment needed to pay back the money borrowed.