Refinancing vs. Loan Modification

Homeowners who are struggling to make mortgage payments in these tough times are looking for the best solution and often they are faced with the choice of refinancing or loan modification. The two loans sound very similar but the difference can mean thousands of dollars to struggling homeowners looking for a fresh start.

Refinancing is rewriting the terms of the mortgage with a new one and it’s an option for homeowners with a good credit score, cash on hand, and a home that has retained its value. When you do the math, however, you may find that the total new payment amount is higher than your original mortgage which may not be the best option for the struggling homeowner. Here’s why:

Credit Score: You might consider refinancing to a lower interest rate mortgage but that will depend on your credit score. If you’ve missed even one mortgage payment, your credit score may have dropped enough to disqualify you from getting the best rates.

Closing Costs: Usually, you’ll pay around 5% of the total mortgage price at closing. So, on a $200,000 mortgage you’d need to come up with $10,000 to close the deal. If you don’t have $10,000 cash on hand, you can add it to the new mortgage, but that would increase your monthly payments.

Property Value: Refinancing depends on your home’s market value. Let’s say your home was worth $200,000 when you bought it. It is now worth only $175000, but you still owe $200,000. You owe more than the property is worth, so refinancing won’t be an option.

Loan Modification
Loan modification is also rewriting the terms of the mortgage with a new one, but loan modifications are specifically designed to help the struggling homeowner. Here are the key points to remember:

Restart Your Mortgage: Loan Modification is a remedy used to bring homeowners current on their mortgage. Mortgage servicers will restructure the terms of the mortgage – lowering the interest rate, extending the terms from 30 to 40 years, or deferring payments altogether – to make it affordable for the homeowner who may have fallen behind on payments.

Financial Hardship: The key factor to be considered for a loan modification is a documentable hardship, like unemployment that reduced the household income, expenses have increased, or costly medical bills paid out of pocket.