When you find yourself struggling to make your mortgage payments, you don’t necessarily have to default—you can make a few adjustments and get back on track without doing significant damage to your credit. A mortgage modification program can provide relief by making permanent or temporary changes to your loan. Understanding what a loan modification involves and how to get one can help you stay on top of your loan payments and potentially keep your home.

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Basics of Mortgage Modification

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A loan modification is a change that the lender makes to the original terms of your mortgage, typically due to financial hardship. The goal is to reduce your monthly payment to an amount that you can afford, which you can achieve in a variety of ways. Your lender will calculate a new monthly payment based on amendments that it makes to your initial mortgage contract

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Mortgage Modification Options

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Your lender might not offer all of these options, and some types of loan adjustments may be more suitable for you than others. However, common alternatives include:

• Principal reduction: Your lender will eliminate a portion of your debt, allowing you to repay less than you originally borrowed. It will recalculate your monthly payments based on this decreased balance, so they should be smaller.1 This type of mortgage modification is usually the most difficult to qualify for, and lenders are typically reluctant to reduce the principal on loans. They’re more eager to change other features which can result in more of a profit for them. If you’re fortunate enough to get approved for a principal reduction, discuss the implications with a tax advisor before moving forward; you might owe taxes on the forgiven debt.7

• Lower interest rate: Your lender can also reduce your interest rates, which will reduce your required monthly payments. Sometimes these rate reductions are temporary, however, so read the details carefully and prepare yourself for the day when your interest rate might increase again.

• Extended-term: You'll have more years to repay your debt with a longer-term loan, and this, too, will result in lower monthly payments. This option is commonly referred to as "re-amortization." But longer repayment periods usually result in higher interest costs overall because you're paying interest across more months. You could end up paying more for your loan than you were originally going to pay.

• Fixed-rate loan: If your adjustable-rate mortgage is proving to be unaffordable, you can prevent problems by switching to a fixed-rate loan where the interest rate is fixed over the loan term.8

• Postponed payments: You might be able to temporarily pause loan payments if you're between jobs but you know that you have a paycheck coming in the future, or if you have surprise medical expenses that you know you will pay off eventually. This type of modification is often referred to as a "forbearance agreement." You'll have to make up those missed payments at some point, however. Your lender will add them to the end of your loan, so it will take a few extra months to pay off the debt.

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