What does "loan modification" refer to in mortgage terms?

Loan modification refers to an adjustment to a mortgage's original terms. This process typically involves changing one or more aspects of the mortgage agreement, such as the interest rate, loan term, or monthly payment amount, to make it more manageable for the borrower. Loan modifications are often utilized when a borrower is experiencing financial hardship and needs to avoid foreclosure or make their payments more affordable.

This differs from paying off a loan early, which is about settlement rather than modification of the original terms, and refinancing, which involves taking out a new loan to replace the old one rather than altering the existing agreement. The option regarding forfeiting a property is associated with foreclosure or short sales, which are separate from the concept of modifying loan terms. Understanding loan modification is critical for borrowers facing economic difficulties, as it can provide them with a more sustainable path to homeownership.