Loan Modification Vs Refinancing - Which Is Right for You?

Loan modification can be an excellent option for borrowers who have fallen behind on their payments and hope to avoid foreclosure. Furthermore, loan modifications are also useful if your credit score has improved since applying for your mortgage loan.

Altering the original mortgage terms such as length or interest rate to reduce monthly debt payments and help keep you in your home can be the solution to keeping it.

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What Is a Loan Modification?

Lenders often modify mortgage loans for homeowners who are having difficulty making payments. Loan modifications often lower interest rates or monthly payments to make them more manageable; some may also reduce principal balances to help borrowers avoid foreclosure; or lenders can extend repayment periods so homeowners have longer to repay their loans.

Loan modifications aim to keep homeowners in their homes while protecting them from foreclosure’s severe credit damage, yet loan modification alone should not be seen as the answer to financial woes; other solutions should also be explored, including forbearance and short sales.

To qualify for a loan modification, you will need to submit an application and supporting documentation, including paystubs, bank statements, profit and loss statements, investment reports, utility bills and tax returns. Your mortgage servicer may send or make available online an application containing information about your DTI ratio as an indicator for whether a modified payment can be afforded by you.

What Is a Refinance?

Refinancing is the process of replacing your current mortgage with a new loan with different terms. A lender pays off your original loan while you take out one with different terms – typically to reduce interest rate payments by refinancing; another reason could be changing from an adjustable-rate mortgage (ARM) to fixed rate (FRM), or shortening loan term so equity builds faster.

Refinancing differs from loan modifications in that it doesn’t require you to provide a hardship letter or additional documents that demonstrate your financial situation. Instead, all that’s required to apply for refinancing is that your payments be current; additionally, refinancing involves conducting hard credit inquiries that could have an adverse impact on your score if initiated improperly – so it is wise to check your report prior to beginning this process.

What Is the Difference Between the Two?

Loan modifications change your mortgage’s terms to make monthly payments more manageable, often by lowering interest rates or lengthening your term (but this could require paying income taxes on any forgiven principal payments). They’re generally available to homeowners facing financial difficulty who have fallen behind with payments or are facing foreclosure; individual lenders and programs often have different requirements; most loan modifications, however, require proof of financial hardship in order for applicants to qualify.

Refinancing involves taking out a new loan to pay off an old one, and is typically only available to homeowners with enough equity in their homes, an excellent credit score and debt-to-income ratio and enough income to meet repayment of their new loan payments. Refinancing can also help those looking to lower interest rates or change from an adjustable-rate mortgage to fixed rate or tap their home equity for cash.

Which Is Right for You?

Homeowners having difficulty paying their mortgage may wish to adjust the terms of their payments. Refinancing may provide lower interest rates or switching from a 30-year to 15-year mortgage can help pay down debt quicker and save on interest charges.

Loan modifications can assist borrowers who are experiencing financial difficulty and at risk of foreclosure. Lenders may agree to reduce monthly payments, suspend or pause them temporarily, add past-due principal to the end of their loan, or forgive a portion of debt as part of a loan modification solution.

However, loan modifications are only available to those who can demonstrate financial hardship and meet specific program requirements. To determine if loan modifications are the right solution for you, speak to your lender, mortgage expert or housing counselor – they can discuss all available options with you and help weigh both refinancing and loan modification against each other.