What is the purpose of a “loan modification”?

A loan modification serves the primary purpose of changing the terms of an existing loan to make it more affordable for the borrower. This can involve adjusting the interest rate, extending the loan term, or altering other aspects of the loan agreement to reduce the monthly payment or make the loan more manageable in light of the borrower’s current financial situation.

This process is particularly beneficial for borrowers facing financial difficulties, as it aims to avoid foreclosure by allowing them to keep their home while meeting their payment obligations. By providing relief through a modification, lenders also reduce the risks and costs associated with foreclosure, making it a mutually advantageous solution.

In contrast, refinancing an existing loan focuses on replacing it with a new loan, usually under different terms, which may not necessarily cater to improving affordability. Paying off a loan early involves settling the loan before its maturity, which is not the objective of a modification. Finally, converting an adjustable-rate mortgage to a fixed rate is a specific type of change but does not encompass the broader context of affordability that a loan modification addresses.