As the name suggests, a loan modification is a modification of your original loan terms. It should help make your mortgage payments more affordable. Each lender has different programs.

Lenders allow loan modifications because it’s less expensive than foreclosure or a short sale. They don’t have to worry about taking possession of the house and selling it. Instead, they get some or most of the funds they lent you on different terms.

• Lower your interest rate – Some lenders will lower your interest rate to make your payment more affordable. But, again, it may be a permanent change or temporary, gradually increasing each year. The maximum interest rate, however, will likely be much lower than your current rate.

• Extend your term – If you’re having trouble making your payments, a longer term may help make the payments more affordable. However, keep in mind if they don’t lower your interest rate, you’ll pay more interest over the life of the loan because it will take longer to pay the loan in full.

• Interest-free options – Some lenders will take a portion of your balance, usually 30%, and make it subject to no interest. In addition, you don’t have to pay back the 30% until you refinance or sell the home. This way, your payment decreases because of the lower principal balance subject to interest.

• Roll payments onto the end of the loan – If you fall behind, your lender may be able to forgive the payments for now and tack them onto the end of the loan. This essentially extends your loan term.

You must contact your lender to get a loan modification and discuss your situation. This isn’t the time to hold anything back; let them know the issues you’re experiencing so they can set
you up with the right program.

They’ll typically have you complete an application and provide proof of your financial difficulties, including paystubs, W-2s, and bank statements.

If you’re approved, each lender works differently, but typically they put you on a temporary loan modification to ensure you can afford the payments.

For example, if they approve your application for a modification, they’ll put you on a trial run for three months. Then, if you make your new payments on time within those three months,
they’ll make the new payment permanent and modify your recorded mortgage.

If you don’t make the payments on time, it’s back to the drawing board, which usually means a short sale or foreclosure.

A loan modification sounds a lot like refinancing, but they are different. Here’s what you should know.

When you refinance, you take out a new loan and pay off your existing loan. A loan modification only modifies your existing loan. You don’t change lenders or get a new loan. However, a refinance, like a loan mod, might result in lower interest rates and payments. The difference, though, is you may be able to borrow more than you currently owe, using your home’s equity as collateral, but not on a modification.

With a mortgage refinance, you must qualify with good qualifying factors and pay closing costs. That’s not the case with a loan modification, but you also don’t get a new loan with new terms. it’s a modification of your existing terms.

In short, a loan mod is for homeowners struggling to keep up, and a refinance is for homeowners who want different rates and terms or want to tap into their home’s equity to take cash out.