Is a Loan Modification a Good Idea or a Bad Idea?

You might have heard of loan modification as an option, especially if you’ve ever been super behind on a loan. But what exactly is loan modification, and is it a good idea?

Loan modification is an option that lowers your monthly payments and shows your mortgage as current, keeping you from receiving those phone calls about catching up on payments.

Is a Loan Modification a Good Idea?

There are definitely a lot of benefits to loan modification, but there are a lot of downsides as well. That doesn’t mean that loan modification isn’t the best option for you, but you should consider all the pros and cons before making a decision on if loan modification is a good idea for you. 

Loan modification is better for the lender

For example, the lender will almost certainly come out on top in this situation. Loan modification isn’t the same as refinancing, which helps you get a better interest rate if you have a good enough credit score.

Instead, loan modification tends to be the best option for a homeowner whose credit is bad and can’t refinance the loan. With loan modification, the lender changes the terms of your loan, especially when you’re going through a financial hardship like losing a job or paying off some hefty medical bills. In changing the terms of the agreement, your monthly premium decreases, so that you can get back on your feet financially, find a new job, pay off those medical bills and continue paying off the loan.

On the flip side, while your monthly payments tend to decrease, the length of your loan is likely going to stretch out longer. In order to decrease the monthly premium, the lender will typically increase the term of your loan, adding more interest to the amount that you’re paying over time. 

Loan modification is confusing

Loan modification can be super confusing, especially when you’re filling out a ton of paperwork, so make sure that you take the time to fully read what you’re agreeing to before signing the paperwork, so that you can figure out if loan modification is a good idea for you and your family.

For example, if you’re $50,000 behind on your mortgage payments, it’s very unlikely that your lender is simply going to forgive this amount when changing the terms of your loan. Instead, the lender will most likely add that amount to the end of your loan, adding interest as well. Your monthly payments might be more affordable, but you will probably be paying off the loan for years longer than your original agreement. Make sure you understand this before signing the loan.

Loan modifications are confusing in general, because there is no one-size-fits-all approach to changing the terms of the loan. And changing the terms of a student loan or a car loan is not the same as changing the terms of a home loan. Typically, a home loan is more complex, so make sure you understand what you’re getting into before you sign the agreement.

Loan modifications take a lot of time and work

When considering if loan modification is a good idea for you, take into consideration how much time, work and energy changing the terms of your loan will actually take. Sure, if you’re drowning in debt and just need an option that will keep your mortgage current and keep you from losing your home, loan modification is probably worth all the time and energy. But if you just want to lower your monthly payments, you might want to look into other options like refinancing.

When you’re going through the loan modification process, you will likely need to fill out a ton of paperwork, some of which will be very confusing, but if you’re desperate enough and worried about losing your home, loan modification might be worth the hassle. Consider the following questions:

Do you have a super high interest rate on your home?

Are you behind on your mortgage payments?

If you answered yes to one or both of these questions, loan modification might be the best option for you.

Loan modification attracts con artists

Another thing to consider when deciding whether to go through with loan modification is that third-party companies and con artists will likely come out of the woodwork and try to offer you an illegal loan servicing deal, especially if your home goes into foreclosure and goes on public record.

Homeowners who are considering loan modification are typically very vulnerable. If you’re considering it, you’re likely going through some kind of financial struggle and having trouble making your current monthly payments. Third-party companies and criminals often see this as an opportunity to make money off of your hardship.

That’s why it’s so crucial to do your research before making a decision on whether to sign a loan modification agreement. Look at the company’s website. If they’re harming other homeowners with illegal loan servicing or debt collection practices, then you’ll likely see a high number of customer complaints with the Consumer Financial Protection Bureau (CFPB).

It’s probably enticing when you’re considering loan modification to just sign the agreement to get the lower monthly payments and solve your financial problems with a quick fix. But acting out of desperation can often lead to getting conned. So take your time to research the company you’re considering thoroughly beforehand.

It also helps to know some of the laws around loan modification, so do your research on that as well. For example, some con artists try to get homeowners to send upfront legal fees beforehand, which is actually illegal. Do your due diligence and make sure you know what’s legal and what’s not before signing an agreement or sending a company a check.

So there you have it! You now know a lot more about loan modification and whether it might be a good option for you. If you’d like more information about loan modification, feel free to visit Van Horn Law Group’s website here.