Parts of your mortgage can be restructured or modified to change the amount of your monthly payments. A mortgage carries an interest rate that indicates how much you will pay annually on the principal money you borrowed. The interest over the life of the loan plus the principal, divided by the number of months you have to pay off the loan, results in your monthly payment. Payments to an escrow fund for taxes and insurance may be added on top of that. A change to any of these elements changes your payment amount.
The bank that makes your mortgage usually sells it to an institution that invests in mortgages. This provides more money for the bank to use to make more mortgages. The bank collects your payments and takes a small percentage fee for the service. Then it passes the rest of the money along to the investor. Banks that do this are called servicing banks, and nearly all banks sell off and then service their mortgages. In loan restructures or modifications, your servicing bank's loan policies will govern what it is willing to do for you, if anything at all. What a servicing bank can do is sometimes limited by its agreement with the investor who owns your loan.
Fannie Mae and Freddie Mac are the largest mortgage investors. Before you talk with your servicer, go to the Fannie Mae and Freddie Mac mortgage lookup forms to see if either of them owns your mortgage. Having a Fannie or Freddie loan sometimes makes a big difference. They may have more lenient requirements and may be participating in a government program to assist homeowners, such as the Making Home Affordable Program, which was designed to offer mortgage modifications and refinances for homeowners affected by the mortgage crisis of 2008. Other investors are institutional pension funds, bond funds and insurance companies. Some of these investors will allow a restructuring or modification of your loan, or you may have to refinance the loan through another lender.
Restructuring vs. Refinance
Technically, a refinance is a new loan that pays off the old loan with the proceeds of the new one. It can be done with the bank that originated the loan or it can be done with a bank that gives you a better deal, so shopping around is essential. A restructuring, on the other hand, is done through negotiation with your servicing bank. It involves changing the terms of your mortgage. For example, if you want lower monthly payments, the length of the mortgage might be recast to 40 years so the balance is spread out over more and lower payments. If you have a particularly high interest rate, you may ask to have it lowered so you will be more able to comfortably make your payments. A modification of this sort uses the number of years left to pay, possibly in combination with changing the interest rate, to change your payment. You might also want to change features of your loan, such as the escrow account or the type of loan. A restructure or modification is a negotiated change that usually is based on a requirement such as imminent foreclosure.
Restructuring or modifying your loan requires you to prove you can afford the new payments. Your recent tax returns, bank account statements and pay stubs are basic documents your servicer will need. If you are self-employed, prepare a profit and loss statement for your business and documents proving that your income is stable, such as customer payment histories and copies of contracts. The servicer may also need to see documents that prove disability, death of a supporting family member or divorce papers among other proofs of your need for a modification. If you have an interest-only loan, an adjustable-rate mortgage or a pick-a-pay loan, the servicer may restructure it into a conventional mortgage. However, if you want to pay off your mortgage in less time than is required by the full term, you do not need a restructure or a modification. Just add money to your monthly payment and indicate it is to be applied against the principal.
Victoria Duff specializes in entrepreneurial subjects, drawing on her experience as an acclaimed start-up facilitator, venture catalyst and investor relations manager. Since 1995 she has written many articles for e-zines and was a regular columnist for "Digital Coast Reporter" and "Developments Magazine." She holds a Bachelor of Arts in public administration from the University of California at Berkeley.