Banks can change the terms of your loan to make payment more affordable. These changes are often referred to as loan modifications, and may be permanent or temporary. We will talk about the specific changes that could happen here. For an overview of modifications, including how to ask your lender, see What is a loan modification?
Types of loan modifications
There are several ways to change a loan.
The ultimate goal is to make it easier for you to keep paying and stay home (and, most importantly, avoid foreclosure).
Some of these options are better than others – think about which one will benefit you the most so that you will be ready when talking to your lender. Lenders will not always offer all of these options, and you may need to negotiate and continue looking for the most useful results (such as a major reduction) – if those options are even available.
In some cases, you can easily skip a few loan payments, which offers short-term relief from short-term issues. If you are between work (with payroll security on the horizon) or have several medical bills to pay, this might be a good option. Although you will need to make these payments at some point. Your lender will add those missed payments to the end of your loan, which means it will take several extra months to repay the debt.
Moreover, you will pay more interest in this option.
The most attractive option is for your lender to reduce the total amount of your loan. Simply, you would owe less on the loan, and you would get a new monthly payment based on a smaller loan amount. This solution is rarely available (but always worth a try) because lenders are usually unable or unwilling to forgive debt.
If you are lucky enough to have this opportunity, discuss the implications with your tax advisor before moving on.
If your lender reduces your accrued interest rate (APR) on your loan, your monthly payments will also fall. The rate cut may only be temporary, so be sure to read the details of your deal and plan ahead.
Your lender can also extend the loan term or the number of years you have to pay. The longer you pay, the lower your payments. However, you will pay more interest because you owe it for a longer period of time. See below for tips to find out exactly how much more you would pay.
Refinance a loan
You may be able to exchange credit for another loan. For example, you would pay for an existing loan and replace it with a loan that comes with a lower interest rate and a longer repayment period (which would result in reduced monthly payments). Again, this can lead to higher interest costs over the life of the loan, and closing down refinancing costs can be expensive.
To see how changes in interest rate, term and principal affect your monthly payment, see our Loan Amortization Calculator.