Anyone who watches the news or reads the newspaper is going to know all about the current crisis in the mortgage industry. More than eight million sub-prime loans were authorized and a huge number of them have either ended in foreclosure, or are currently at risk of doing so. While many banks are willing to refinance a loan or even offer a second mortgage that allows the homeowner to “catch up”, the United States government is advocating loan modifications through one of the programs that they have recently funded.

Roughly $75 billion dollars has been set aside strictly to help homeowners avoid foreclosure. While the programs that these funds support won’t be able to provide an answer to everyone in financial trouble, a huge swath of homeowners will be able to use the programs to renegotiate their loans and get “current” on their mortgages.

It helps to understand that the programs ask the consumer to still assume the financial responsibility for their homes, but to work with the bank or lender to make it a much more honest loan than it may have originally been. For example, a borrower may have taken a $350,000 mortgage without the income to actually fund such a loan. Luckily, there are many ways in which such a loan could be rewritten to make it payable by the borrower. For example, many of the problematic sub-prime loans extended what are now known as “teaser rates” that would get bumped up to exorbitantly high numbers after a short period of time.

For instance, that $350,000 loan many have been at 4% for the first five years and then become a variable rate without any kind of cap. This means that as interest rates soared, the borrower could see their loan jump from $700 per month to more than $2,000. Obviously that sort of discrepancy cannot be managed by even the tightest budget. A loan modification would turn that loan into a fixed rate mortgage for as long a period of time as possible – up to 40 years. That would make the monthly payment manageable for the homeowner, who could use a fixed and unwavering number to build their monthly budget for years to come.

This approach is much more preferable than a straight refinance because the bank would require a down payment and may not want to extend such a lengthy period to the borrower. The government supported loan modification programs generally force the banks to accept that a borrower needs the best terms possible.