Types of loan modification programs

Although there are many loan modification companies that claim to offer their own scheme of loan refinance to the debtors in need, broadly speaking the loan modification processes can yield primarily four types of modified loan agreements. If you are a prospective applicant then it is important to know the different types to pick one that would suit your needs best.

v  Straight Capitalization type  

In this type of a loan modification any unpaid interest is added to the total principal of the loan. The terms and conditions in the modified loan agreement remain exactly same as the original one. It is obvious that the new loan principal and the subsequent monthly payments are higher than the previous ones, So to qualify for this loan and to prevent foreclosure, the borrower seeking loan modification has to provide financial proof that he/she will able to meet with the increased payments.

  v  Term Extension 

The loan can also be modified by extending the total period within which it has to be paid off by the borrower. Since the total time period is increased the monthly payments come down to a level that is more affordable.  There is clause in this kind of a modification that restricts the extension to the value of the time period of the original loan. For instance the extension limit cannot go past 5 years if the original loan period was 5 years.

  v  Step rate modification  

In a step rate loan modification, the interest rate is altered so as to make the monthly payments more manageable. However this is done only temporarily. The interest rate can be adjusted by a maximum of 3% and that too for the first year after which the rate rises until it comes back to its original value.

  v  Reduced rate modification  

This is a special type of Step rate modification wherein the interest rate is altered permanently for the whole term of the loan.

 The loan modification process is disparate and can accordingly change shape to provide a solution for needful borrowers looking to protect their homes through a mortgage modification in particular.