Once the lender determine that you are a good candidate for their loan modification, they will put you in a trial period for 4 months, making reduction in payments. Even if you are capable of making the full payment, you still have to follow their instruction if you want your loan modification to be approved. This is where your fico score will be affected.
Obviously, when you are making a payment that is less than your normal monthly mortgage payment, the payment will not be enough to cover your monthly interest payment. The lender will then report your payment as a deficiency. Their logical thinking is: because they allow you to make lesser payments, the savings that you will receive each month, you should be able to apply it to your other debt obligations. Within these 4 months, hopefully, your lender will have reached a permanent decision in how to modify your loan. But if they have not, you must continue to make your full mortgage payment once the trial period is done.
I hope this information helps you to understand part of the loan modification process. Good Luck
...so I would saving $500 per month which is great.
If you qualify and are successful in participating in this program, then do it. You will be saving $500/mo. You should be able to convert your ARM to a FIXED RATE product.
What are your options for your current home:
1) Do nothing and pay $2000/mo
2) Do HAMP and pay $500 less/ mo
3) Stop Paying - Live for Free for a while - Ruin Your credit - Eventually get Foreclosed on and evicted.
If you like where you live and plan on living there for a long time , then #2 looks like a good alternative.