A loan modification can improve your terms and save you money without the cost and hassle of a refinance. Unlike a full refinance, a loan modification is not a new note, nor is it a replacement of your original note. It is simply an addendum to the original document, changing the terms as agreed.
Requesting a Modification
A modification request is less involved than an initial loan application. Since a modification is not a new loan, you will contact your lender to inquire about the process. The lender may require some paperwork and updated financials, but nothing as extensive the original process. The lender will review your loan, your payment history and your credit. If you are still in conformance with its guidelines, it will approve the modification.
Once you're approved and ready to move forward, you sign a modification agreement. This is a simple document, no more than a few pages. It describes the terms and date of the original note. For example, “Borrower entered into promissory note dated May 1, 2005, in the amount of $200,000.” The document then goes on to describe the modified terms. For example, “The interest rate on the note is hereby modified from 5 percent to 4 percent as of May 1, 2013.” The modification becomes an amendment to the original note, rather than a replacement.
If your modification involves an increase in your loan amount, the mortgage will need to be amended as well. This is common in lines of credit. For example, if you have a $100,000 line of credit with your house as collateral, the lender has a mortgage recorded with the county clerk in the amount of $100,000. If your line of credit is increased to $150,000, the lender will file a $50,000 mortgage amendment increasing the total amount secured to $150,000. Like the note, this becomes part of, not a replacement for, your original mortgage.
Because mortgages often last 30 years or sometimes even longer, there’s a good chance you may seek to modify the loan more than once. If you go through with future modifications, the process will be the same. The note will be amended with a second amendment referencing it and the previous amendment. The only time the original note goes away is if you refinance the loan or pay it off.