Loan Modification: How Much Can You Save?

Loan modifications are designed to make mortgages more affordable for homeowners. Whether you get an interest rate reduction, a term extension, or a principal forgiveness, the point of getting your loan modified is to reduce your payments so that you can more easily afford it. But how much does a loan modification really save you?

Nationwide, the average homeowner saves $812 a month after a loan modification. Of course, this is far from indicative—the figures can vary from a couple of hundred to several thousand dollars. Below are some of the factors that affect your potential loan modification savings.

Debt-to-income ratio
This number indicates how much of your monthly income goes into debt payments. This includes not just your mortgage, but also your credit cards, student loans, car loans, and other debts you currently have. Most banks will try to fit your monthly payments down to 31% of your debt-to-income ratio, the standard set by the government.

Principal balance
The amount you currently owe is probably the biggest factor in your loan modification payments. For a loan modification to make sense to your lender, your monthly payments must be a reasonable percentage of your balance. Generally, the larger the unpaid amount, the more the bank loses in a loan modification and the smaller your chances of approval.

Type of modification
The most common form of loan modification is an interest rate adjustment. By lowering your interest rates, the bank reduces the amount you pay every month without reducing your principal. The government allows interest rates as low as 2% on a loan modification, if it means bringing the payments down to affordable levels.

Other structure types
If reducing your interest to 2% does not help, your lender may propose other ways to bring your monthly payments down. A common alternative is a term extension, wherein your payments are spread out over a longer period. In some cases a lender may also reduce the principal itself, although this isn’t common in the loan modification market.

Loan modification alternatives
Some homeowners are simply too far behind or are in too much hardship to afford the payments, even after a loan modification. In this case, lenders usually offer other ways to prevent foreclosure, such as a short sale or a deed-in-lieu. These won’t let you keep your home, but they let you get rid of the heavy mortgage without the stress and damage of a foreclosure.