A loan modification isn't a loan. It's not termed a "loan modification loan" -- it's just called a "loan modification."
It works by allowing homeowners and their lenders to negotiate to change the terms of a mortgage, usually to make the payments lower and more affordable to help the borrowers avoid losing the house to foreclosure.
There are a number of ways that borrowers and banks can negotiate for different terms. This list is not exhaustive:
- Lower the interest rate.
- Change an adjustable rate mortgage that may increase in a number of months to a fixed rate mortgage with more stable payments.
- Decrease the amount owed on the principal balance of the loan.
- Take any missed payments and, instead of requiring they be paid now, add them to the back end of the loan.
- Extend the term of a loan from 15 years to 30 years, or from 30 years to 40 years in order to lower the monthly payment.
The original mortgage is not replaced with a new one as in a refinance, but changes are made to the functioning of the current loan.
In some cases the loan modification can provide for an increase in the amount of money borrowed.