loan modification
A permanent change to the terms of an existing loan to make it more affordable.
Example
“The loan modification reduced her monthly payment by $400 and prevented foreclosure.”
Memory Tip
MODIFY — change the loan terms so the debt fits your actual situation.
Why It Matters
Loan modification can help borrowers avoid default and foreclosure by reducing monthly payments or extending the loan term. Understanding this option is crucial when facing financial hardship, as it allows you to restructure debt rather than lose an asset or damage your credit through default.
Common Misconception
Many people believe that loan modification is the same as refinancing, but they are different processes. Modification changes the terms of your existing loan with the current lender, while refinancing means replacing the old loan entirely with a new one from a different lender or the same lender.
In Practice
A homeowner with a $300,000 mortgage at 6 percent interest might request a modification when facing job loss. The lender could agree to extend the 30-year loan to 40 years, reducing the monthly payment from $1,800 to approximately $1,350, making it affordable during their financial recovery period.
Etymology
From Latin 'modificare' meaning to limit or adjust.
Common Misspellings
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