Loan Modification

A “loan modification” is a formal change to the terms of a loan we’ve taken out. For the most part, it’s the borrower who requests a loan modification, usually because they think it’s going to save them some money in the long run. Once the request is made, the borrower and lender work together to sort out new and improved loan terms that (a) ensure the lender will get paid, and (b) ensure that the borrower is able to make the loan payments.

For example, let’s say that, five years ago, we took out a 30-year mortgage loan with a fixed interest rate of 4.26%. Now here we are, five years later, and interest rates have dropped substantially. In fact, we’re pretty sure that if we took out the same loan today, we could lock in an interest rate of 3.11%. That’s a big difference. Working together with our lender, we can work out a loan modification that will allow us to change the terms of the loan so we’re not paying such a high interest rate. We’ll have to apply for the loan modification—and probably we’ll have to pay a couple associated fees, too—but the money we end up saving on the loan itself could more than cancel out all of those up front fees.