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If you are struggling to make your mortgage payments or looking to take advantage of lower interest rates, you may be wondering whether to pursue a loan modification or refinance your mortgage. While both options can potentially lower your monthly payments, there are some key differences between these two strategies. This article will examine loan modification vs refinance so you can determine which route may be best for your unique situation.
What is a Loan Modification?
A loan modification involves working with your current lender to change the terms of your existing mortgage. The goal is to make the payments more affordable and avoid foreclosure.
Some of the ways a lender may modify your loan include:
- Lowering the interest rate
- Extending the repayment period
- Adding missed payments to the loan balance
- Reducing the principal balance
Loan modifications are designed for homeowners who have experienced a financial hardship and are struggling to make their monthly payments. To qualify you’ll need to provide documentation of your hardship such as a job loss reduction in income, or major medical expenses.
What is Refinancing?
With a refinance, you take out an entirely new mortgage loan to pay off your current one. This new loan will have different terms, including potentially a lower interest rate, different loan type, or longer/shorter repayment period.
The main goal of refinancing is usually to reduce your monthly payments by securing a lower interest rate. But refinancing can also be used to shorten your loan term, tap home equity, or switch from an adjustable to a fixed-rate mortgage.
Refinancing is available to any homeowner with sufficient equity, as long as they have a good credit score and stable income. You don’t need to prove financial hardship to qualify like you would for a loan modification.
Key Differences Between Modification and Refinance
There are several key differences to understand when comparing loan modification vs refinance:
- Eligibility – A modification requires hardship while a refinance just needs good credit and income.
- Cost – A modification has minimal fees but a refinance has closing costs of 3-6% of the loan amount.
- New Loan – A modification keeps your existing mortgage while a refinance replaces it with a new loan.
- Credit Impact – Missing payments before a modification can hurt your credit but a refinance alone won’t.
- Home Equity – A modification doesn’t use equity but a refinance lets you cash-out if you have sufficient equity.
When to Consider a Loan Modification
Pursuing a loan modification with your lender makes the most sense if:
- You’ve experienced a hardship like job loss, divorce, or medical crisis.
- You have little equity in your home.
- Your credit score has taken a hit making refinancing difficult.
- You need immediate relief and can’t wait for a refinance to close.
- You want to avoid foreclosure and stay in your current home.
The advantage of a modification is that you can get quick payment relief without the costly closing fees of a refinance The downside is that you must prove financial hardship and your credit could suffer if you are behind on payments
When to Consider Refinancing
A mortgage refinance may be the better option if
- Interest rates have dropped significantly since you took out your original loan.
- You have built up equity in your home and good credit.
- You want to tap equity to do renovations or pay other debts.
- You want to shorten your loan term and pay off your mortgage faster.
- You want to drop mortgage insurance by refinancing out of an FHA loan.
Refinancing works best for homeowners in stable financial shape who want to leverage low rates or access equity. Just be aware that closing costs can be steep, so calculate your break-even point to ensure the monthly savings exceed your upfront costs.
How to Decide Which is Best For You
Determining whether to modify or refinance your mortgage loan depends largely on your current situation.
Ask yourself these key questions:
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Have I experienced financial hardship and struggled to make payments? If so, a modification may be your only option.
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Do I need immediate relief from unaffordable payments? Modifications provide faster payment relief.
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What is my credit score and income stability? Refinancing requires good credit and steady income.
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How much equity do I have in my home? You’ll need equity to qualify for most refinances.
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Has my credit taken a hit from missed payments? Lenders look past credit dings for modifications.
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How urgent are my goals? Refinancing can take 30-60 days to close while modifications happen faster.
Carefully consider your unique situation including your financial health, equity, and goals before deciding if a loan modification or refinance makes the most sense for you. Evaluating the pros and cons of each option will help you make an informed decision.
Be sure to talk to your lender about your options as well. They can provide guidance on which path may work best for your needs. With the right approach, you can find a solution to make your monthly mortgage payments more affordable.
How loan modification works
A loan modification adjusts your current mortgage to make the monthly payments more affordable. To achieve that goal, lenders can reduce the interest rate, extend the loan term or change the loan type (or do a combination of all three). You’ll typically pay a small administration fee to modify your loan.
When you refinance your mortgage, you replace it with a different one, often with a new interest rate or loan term. Homeowners typically refinance to lower their monthly mortgage payments, pay their home off faster or tap into home equity. Unlike a loan modification, it comes with hefty closing costs.
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- If youre seeking more affordable mortgage payments, a loan modification or refinance can help bring relief.
- Loan modifications cater to homeowners experiencing financial hardship who are unable to make timely payments but want to stay in their homes.
- Mortgage refinancing replaces your current loan with a new one, often to get a lower interest rate, a different term or both.
A loan modification and a mortgage refinance aim for the same goal — to save you money by lowering your monthly payments. However, when it comes to which option you should choose, keep in mind that these two tactics and their use cases are quite different. To help you explore mortgage modification vs. refinance, let’s look at these two options.
What is the difference between a Loan Modification and a Refinance?
FAQ
Is refinancing and modification the same thing?
What is the disadvantage of loan modification?
Is mortgage loan modification a good idea?
How much will a loan modification reduce my payment?
What is the difference between loan modification and refinancing?
It’s more than just lowering your monthly payments What’s the Difference Between Loan Modification and Refinancing? Which Is Right for Me? Loan modification allows people with financial hardship to restructure their loan, while refinancing shifts you to a new loan.
What is a mortgage modification?
A **mortgage modification** is a change to the terms of your existing mortgage loan, aimed at making it more manageable for you.Here are the key points about mortgage modifications: 1.**Purpose**: The
Should I refinance or modify my mortgage?
If you’re behind on your mortgage payments due to a financial hardship, for example, you might seek out a loan modification. A modification alters the terms of your current loan and can help you avoid default or foreclosure. If, on the other hand, you’re up to date on your loan payments and looking to save money, you might opt to refinance.
Can a mortgage modification replace a home loan?
This is typically done by lowering the mortgage rate or extending the loan’s repayment term. “A mortgage loan modification does not replace your existing home loan or your lender,” explains Karen Condor, a finance and insurance expert with Loans.org.