Loan Modification: How Much Will Payments Be Lowered?

Loan modification describes any one of the processes used to change your loan terms, including refinancing, settling or consolidating. With a mortgage loan, consolidation and settlement are not typically possible. Therefore, refinancing is the standard method to reduce mortgage payments. There are two possible methods to refinancing a loan: refinancing directly or using a third party. 

Refinance Directly to Lower Payments

It is often cheaper and less damaging to your credit to refinance directly where possible. Contact your lender first to discuss refinancing options. Start with your target monthly payment in mind. If you have to reduce monthly payments because of a change in your income that could otherwise lead to delinquency or default, make your lender aware of this situation. In these cases, it often benefits the lender to offer you the lower monthly payments rather than allowing you to stay in a loan you cannot afford. You may have to accept a longer loan or higher interest rates in the long run. However, you can typically lower your payment by 10 percent or more through direct refinancing. If you are not in immediate need of refinancing but would like to lower your payments, more negotiation may be necessary.

Refinance through a Third Party

You can take out a new mortgage to pay off your first loan in order to refinance. This option can be damaging to your credit, but it will often present you the largest savings. This option is particularly popular for those refinancing out of choice rather than necessity. If you can afford your loan just fine but think there may be cheaper options on the market, using a third party to refinance is perhaps the best route to take. In this case, you can reduce your payments by 10 percent or more, and you may not even have to take the immediate rate increase. The third-party lender has an incentive to offer you a discount: it wants to win your business.  

Refinance to an FHA Loan Option

The Federal Housing Administration offers three methods to refinance your home for cheaper monthly payments. The first is a cash-out refinance. This is offered to seniors who have paid off or nearly paid off their mortgages. Since they are living on a fixed income, these individuals may want to pull equity out of their home for extra spending cash. The FHA offers to guarantee a new loan for these seniors to have the option to do so.

A second refinance option is the FHA streamlined refinance. This option is available only to borrowers who have an existing FHA loan and would like to lower rates or monthly payments. They can apply for a re-evaluation of their current loan to find potential savings. The option is called "streamlined" because the borrower has to fill out paperwork only once to refinance the loan with the private lender and the FHA.

A third option is for those borrowers in high-cost, adjustable-rate loans who can no longer afford their mortgages. If this describes you, research the Making Home Affordable initiative for more options.

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