If you file for Chapter 13 bankruptcy, you may start receiving unsolicited mortgage modification offers from your lending company, which present you with a potential offer aimed at making your home more affordable. Modifying your mortgage differs from refinancing in that refinancing completely eliminates your original loan, replacing it with a new one, whereas a modification refers to a change in your existing loan.
Just how might the terms of your loan change should you decide to move forward with a mortgage modification?
Potential changes to loan terms
The main point of a mortgage modification is to lower your payments until they become more manageable. This might include lowering your interest rate, switching from an adjustable rate to a fixed rate, or extending the length of the loan to give you more time to pay. It may, too, give you more options in terms of deferring or forgiving some of your principal balance or adding an additional amount on the back end of your loan.
Advantages and disadvantages
When it comes to mortgage loan modifications, there are benefits and drawbacks. In terms of benefits, you may find that you can modify your loan faster than you can refinance it. Furthermore, your interest late on a mortgage modification will typically remain low for about five years, and even after that, it typically will not climb higher than your contract rate, or the standard rate reserved for well-qualified buyers.
In terms of drawbacks, mortgage modifications leave you with a new, 40-year amortization schedule. If you are already in middle age, this could mean taking on a new debt for the remainder of your life.
Ultimately, whether a mortgage modification is a good idea for you depends on the unique circumstances of your situation and finances. If you are experiencing considerable financial stress that stems in large part from your mortgage responsibility, a mortgage modification may help you manage your finances and avoid Chapter 13 bankruptcy.