If you are trying to stop foreclosure, or have a mortgage payment that is too much, then you've probably thought about getting a mortgage modification. A mortgage modification is when the terms of a loan are permanently changed to allow a reduced payment.

The reduced payment is accomplished by either reducing the interest rate, lengthening the term, or lowering the balance to be more in line with the current market value. In most cases, a combination of all three of these choices are used to reduce the mortgage payment. There are other interesting options to reduce a payment with a modification too, but they all center around the term of the mortgage, the payoff, and/or the interest rate.

Here is an uncomplicated example of how a mortgage modification can lessen the payment, using each of the three options above.

Method #1 – Dropping the interest rate

Lets assume the mortgage balance is $200,000 and the current interest rate is 7.75% and the payment amount is $1,750. Lets also assume this borrower has 20 years left on a 30 year loan. The borrower can no longer afford this payment because of a loss of income. They can afford a $1,250 payment, so the bank agrees to reduce the interest rate to a fixed rate of 4.25% for the remaining life of the mortgage. This will give them a payment of $1,240, without the need to lengthen the term of the loan or lower the payoff amount..

Method #2 – lengthening the term of the loan

Lets use the same example above, only this time, we'll assume the homeowner can afford a $1,500 payment. The loan amount will still be $200K and the interest rate will still be 7.75%. But in this case, the investor was not willing to reduce the interest rate. This happens very often, because the investors on the loan are not willing to accept a reduced rate. In this case, extending the length of the mortgage will make the payment affordable again and the investors will keep their 7.75% interest rate. The $200,000 balance is re-amortized over a 30 year period to get a reduced payment of $1,430. Everyone is happy because the foreclosure was prevented and the new payment is affordable.

Method #3 – Dropping the payoff amount

In order for a payoff amount to be reduced, the value of the house must be less than the payoff amount. In a few cases, lenders will reduce the payoff amount without this stipulation, but it's highly doubtful. To get the payoff amount reduced, you must give documentation to the lender that foreclosing on the house will cost more than dropping the amount owed to make the loan affordable again.

In this case, we'll assume the home's current market value has been established at $179,000, but the payoff is still $200,000. If the bank forecloses on the property and tried to re-list it, their estimated loses will be 30% of the home's value. So after foreclosing on the property and re-selling, they will receive approximately $125,000, if they are lucky. Most lenders expect to lose 30%-60% on every foreclosure property, so this amount is being very generous.

By allowing the existing owner to keep the house, with a new affordable payment, they can continue servicing the loan and collect the full value, plus interest. This is a much better option for the lender, assuming the new payment is affordable. By reducing the payoff to $179,000 and keeping the same interest rate and 20 year term, the new payment is $1,470, which now fits into the homeowners $1,500 budget.

Using All Three Options At The Same Time

When working on my personal clients, I generally try to get the lowest possible payment, which would mean dropping the interest rate and payoff, while lengthening the mortgage to 30 years. By negotiating all of these areas, a new payment of $880 could be fixed for the life of the mortgage. An experienced loan modifier knows exactly how to get the lowest possible payment in the shortest amount of time.

Negotiating with investors is all a matter of having the right information and being prepared. It's not something most foreclosure victims can achieve without help, regardless of what many people may think. A mortgage modification is the solution to keeping and affording your house. Negotiating your case without experience can not only cost $1000's but it can cost you your home!

In the example above, the difference between a good modification and a bad modification adds up to over $100,000 in extra payments over the life of the mortgage! So even if you are successful with a modification on your own, it could still cost you over $100,000! If you don't understand the foreclosure process, or don't have confidence in your ability to get an approval, make sure you employ someone to help immediately. There is no time for "on the job training" when a single error could cost you your home!