Loan Modification Or A Refinance: Which One Works Best For You Depends on Your Financial Situation
Are you looking at saving money on your mortgage? A loan modification or a refinance are two options at your disposal. Contrary to popular belief, you don’t need to be in foreclosure or be delinquent on your mortgage to get a loan modification. Keep in mind, a loan modification was designed as a loss mitigation tool. You may need this if you are struggling to make mortgage payments and prevent losing your home to foreclosure.
Also, for a loan modification you don’t necessarily need to be behind on your payments. You will have to show a hardship or a hardship on the horizon.
Whereas, with a refinance, you’ll need to be current on your mortgage payments. You also have to prove that you can afford the new payments.
How Loan Modifications Work
A loan modification adjusts your current mortgage to make the monthly payments more affordable. Lenders will rewrite the interest rate, extend the loan term or change the loan type.
How Refinancing Works
When you refinance your mortgage, you replace it with a new one. This usually comes with a new interest rate or loan term. Homeowners typically refinance to lower their monthly mortgage payments or tap into their home equity. Unlike a loan modification, it comes with hefty closing costs.
Does A Loan Modification Make Sense For You?
Do have trouble staying current on your mortgage payments or see a hardship on the horizon? A loan modification could make sense.
- You have poor credit. Modifications are attractive because they don’t require a high credit score. Loan modifications were originally designed to keep borrowers out of foreclosure.
- You need immediate relief. Usually, loan modifications provide immediate mortgage relief. Whereas refinancing your mortgage can take 30-60 days to complete.
- The bad news is borrowers can’t access cash with a loan modification. However, a homeowner can still sell their home with an active loan modification.
The Pros Of Getting A Loan Modification
- Lower monthly payments: You can extend the loan term and/or lower your interest rate.
- Avoid default and foreclosure: A loan modification can help you avoid losing your house from missing mortgage payments.
- Keep the same loan with new terms: This is a big difference between loan modification and refinance. With a modification, you keep the loan rather than swapping it out for a new one. This helps you avoid paying closing costs for initiating a new loan.
- No Closing Fees: A loan modification just modifies the terms of the existing loan. Therefore, you are not required to pay new title fees, transfer taxes and other closing fees.
Cons of loan modification
- Must show hardship: Lenders will explore this option with you if you have a financial hardship.
- Your credit score might take a hit: Some lenders may not offer a loan modification until you have missed payments. However, there are still ways to to get a loan modification if you are not delinquent on your payments.
- Negotiating with lenders can be a nerve wracking process: Lenders aren’t required to accept your loan modification application. However, lenders will accept applications if presented properly. Just remember, to be ready for some potentially time-intensive processes to find a solution that works for you and your lender.
- Waiting period to refinance: Some lenders institute a waiting period. If yours does, you’ll need to get through it before you can explore a refinance after loan modification.
Does Refinancing Your Home Make Sense For You Instead?
If you’re up-to-date on your mortgage payments, refinancing might make sense especially if you have high credit scores. Other reasons it can make sense to refinance include:
- You could get a lower interest rate. The classic reason to refi is to lower your payments with a interest rate. However, your situation may not yield such dramatic savings. Remember, interest rates are also at a 20-year high.
- You’re renovating your house. If it’s time to update your kitchen, upgrade your bathrooms or otherwise modernize your house, mortgage money is the cheapest financing available. A cash-out refinance lets you tap into home equity to pay for construction. This makes the most sense if you have plenty of equity, and if the renovations will add to the resale value of your home.
- You have an FHA loan. Borrowers who used FHA loans can be especially good candidates for refinancing. That’s because FHA loans include steep mortgage insurance premiums that don’t go away over the life of the loan. The mortgage insurance premium on an FHA loan is between 0.45%–1.05% per year, depending on your loan size and how much you put down. Eliminating that monthly fee could make refinancing into a conventional loan without mortgage insurance a good move.
Pros Of Refinancing
- Lower interest rate: This has been a huge driver of refinances in the past two decades. However, with rates at historic highs right now, you may want to wait if this is your main reason to refi. Therefore, you may want to look at a loan modification.
- You can pull cash out: If you choose a cash-out refinance, you can turn some of your equity in your house into liquid capital that you can use however you want.
- You can switch terms: You might refi into a loan with a shorter term so you can pay down your mortgage faster. Or you might refinance an adjustable-rate loan to a fixed-rate one to avoid paying more if rates continue to climb.
Cons of refinancing
- You’ll need solid credit and income: The underwriting process for a refinance is not unlike the one to get your first mortgage. Lenders want to see you’re in good financial standing before they issue you a new loan.
- Closing costs are steep: Expect to pay thousands of dollars to refinance your mortgage.
- You could reset the clock on your debt: When you refi, you’ll have the option to choose the new loan term. Say you’re five years into a 30-year mortgage. While refinancing to a new 30-year loan could lower your monthly payments, it means you’re looking at day one of a new three-decade loan.
To Learn More About Loan Modifications And If They Right For You, Feel Free To Contact Us At 888.737.6344.
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