How Loan Modification Affects You: The Good and the Bad

In the midst of the recession and a collapsing real estate industry, many homeowners are being forced to face — either through job loss, increasing interest rates on an ARM, poor financial planning, or other reasons — the possibility of losing their home. While loan modification is being ballyhooed as a savior for these homeowners, the reality is that it can’t save everybody, and there are financial implications to modifying one’s mortgage.

When faced with foreclosure and the possibility of losing your home, it’s easy to look at loan modification and see only the positive aspects. And for some, modifying their mortgage really is the best option. But is it the best choice for you? Only you can decide. But here are a few things you may want to consider before diving in.

The Good

All the good points of loan modification look great, and it’s easy to see why so many are attracted to it as a solution. Loan modification was designed as a way to provide relief for homeowners in dire straits and help put them back in control of their home ownership.

It does this by potentially lowering interest rates, increasing the term, forgiving late fees, and rolling up delinquent payments into the principal balance among other possibilities. What’s not to love about that?

Another great aspect of loan modification is that it won’t negatively impact your credit. Naturally, if you have been missing payments then your credit has already taken a hit. But modifying your mortgage won’t make it worse.

Once you’ve gotten back on your feet and start making regular on-time payments again, your credit score will bounce back.

The Bad

There’s not really a “bad” about loan modification, but rather more of a “you should be aware of certain things.”

To start with, to get the best deal possible you’re going to want to hire a loan modification company. Because there are legal issues and serious negotiations that will take place, attorneys are often involved in the process. Combine that with the paperwork that needs to be processed and you’re typically looking at a hefty fee of several thousand dollars.

Now in many cases, those fees can simply be rolled up into the principal balance. And if it means that you won’t have to catch up on several months of back payments and your late fees are all forgiven, then it is very often worth it.

The truly negative aspect of modifying a mortgage comes as the result of poor financial management on the part of the homeowner. If the homeowner is in trouble because they didn’t manage their money well, loan modification won’t turn them into a financial wizard. If he or she doesn’t get financially disciplined, then all that will happen is an extension of the inevitable — the loss of their home.

But if the homeowner can learn from their past mistakes and buckle down and get serious about their finances, then loan modification can truly be the savior they are looking for.