What are my options for changing my mortgage terms?

Q: I am struggling to meet my monthly mortgage payments, and I'm thinking of asking my mortgage lender about changing the terms of the loan. What should I ask for?

A: A good place to start might be to go to the US Housing and Urban Development website (www.hud.gov) to see whether you qualify for any government-sponsored programs. However, just because you qualify for a program doesn't necessarily mean you should apply for it. Here are the three basic ways to change your loan terms, and some of the pros and cons of each:

  1. Mortgage-loan refinancing. Lowering the interest rate on your loan is the ideal way to ease your monthly payment burden, but you can also refinance to lengthen your loan and thus reduce the monthly payments. However, the latter could result in you paying more interest over the life of your loan.
  2. Loan modification. This is where your existing lender agrees to restructure the current terms of your loan, most likely by lengthening it out to reduce the current monthly payments. Again, any lengthening of the loan could result in you paying more interest over time, but if that's what's necessary to keep up with the monthly payments, it may be worth it.
  3. Principal reduction. If you have a demonstrable financial hardship, you may be able to convince your mortgage servicer to reduce the remaining amount you owe. If you want to pursue this option, ask about the Principal Reduction Alternative, which is part of the federal government's Making Home Affordable Program. However, principal reduction could have both tax implications and damage your credit history.

Overall, refinancing to a lower interest rate is the best way to change your mortgage loan -- it both reduces your payment now and reduces the total interest you will pay over the life of the loan. However, with mortgage rates rising, the refinancing window is shutting, so don't delay in exploring this option.

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