Loan Modifications: Pros and Cons

Many people think of a loan modification as a bad thing; a last ditch attempt to stop foreclosure or they assume that the homeowner must be in serious financial difficulty. However that is not always the case, homeowners who are simply looking to lower their monthly repayments can also receive loan modifications.

Benefits of a loan modification include:

  • Lower monthly mortgage payments. Many people who bought their homes in a time of economic prosperity are now realising that they are paying more than they can realistically afford whilst still being able to maintain an acceptable standard of living. For some, they may have lost their job or may not have as much money coming in every month, so a loan modification can find an appropriate solution to allow the homeowner to lower their monthly payments, and keep their home without facing foreclosure.
  • Reduced interest rates. There are many homeowners who are paying a higher interest rate than is necessary. A possible reason for this is having poor credit when the mortgage was originally agreed. If the homeowner has improved their credit rating, they could benefit from a modification to reduce the interest rate on their mortgage. Additionally, homeowners who are on an adjustable rate mortgage may have had a lower introductory rate which then substantially increases after a number of years. These homeowners could potentially modify their loan to be placed on a fixed rate mortgage instead.


Potential drawbacks of loan modification can be:

  • Depending on individual circumstances, some loan modifications may cause a drop in the homeowners credit score, and may be highlighted as negative on a credit report when the homeowner is applying for credit. However, those with a good credit score and history should not have a problem.