If you have landed on this article, you are probably asking yourself: How do I reduce my mortgage payment, provide financial security for myself and my family, and keep my home? You may have Googled “loan modification vs refinance.” Maybe you read about home loan modification in a letter from your lender or read about refinancing online. But what is the difference between a loan modification and a refinance?
If you have asked yourself this question, then this article is for you! The primary difference between loan modification and refinance is that, if you are experiencing financial hardship and fear you will lose your home, then you may be able to get approved for a loan modification. If you want to decrease mortgage payments and are not defaulting or at risk of defaulting, refinancing is a good option.
In this article, we will break down the differences between loan modification vs refinance, define what each one is, and discuss the requirements and benefits of each.
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Loan modifications are a long-term financial relief option when you cannot afford mortgage payments, are on the brink of default, or have already defaulted. A loan modification changes the terms of the loan itself to reduce mortgage payments.
Modifying a home loan is a fantastic idea if you are unable to make mortgage payments, but can be very challenging to do on your own.
Requirements for a Loan Modification
To get a loan modification, you need to have already defaulted on mortgage payments OR be in a situation where defaulting is imminent. Typically, defaulting is due to hardship, such as the loss of a job, loss of a spouse, or unforeseen medical expenses.
Loan Modification Process
The loan modification process requires substantial documentation, including a hardship letter, uniform application, tax statements, proof of income, and much more. To get a loan modification, you also have to keep track of strict due dates, various documents, and often conflicting letters from your lender.
Because loan modification can be a complicated process, the best way to get the right deal and ensure your loan modification is completed is to hire an experienced loan modification attorney.
Benefits of a Loan Modification
Loan modification is a powerful tool that can be used to avoid foreclosure without having to file for bankruptcy. However, this is only the case if a loan modification is completed in time! Once a certain point is passed, the only realistic way to save your home will be to file for bankruptcy.
You can get a loan modification that will:
- Reduce your principal.
- Change your loan term.
- Lower your interest rate.
Obtaining the right loan modification can save you big! But all too often, people settle for a mediocre deal. In some cases, people get loan modifications that reduce their monthly payments by just a few dollars. It’s hard to say no when someone is offering you financial relief! But it is important to secure a deal that will actually make a difference.
In short, it is important to hire the right loan modification attorney to get the right deal.
When You Should Get a Loan Modification
You should get a loan modification if:
- You have an underwater mortgage-meaning you owe more on your home than your house will appraise for.
- You are behind on monthly payments-a lender will not allow you to get a loan modification unless you are at risk of defaulting or have already defaulted on mortgage payments.
- You need a principal reduction-you cannot reduce your principal with a refinance.
Refinancing, on the other hand, means you take out a new home loan to pay off your old one. This new loan will have its own interest rate and terms. You may be able to leverage your equity to take cash out of your home. Unlike a loan modification, you can choose to refinance with a different lender than the lender who made your original loan.
Requirements For a Refinance
Whereas loan modification requires that you are defaulting or will default on payments, refinancing requires the opposite. In order to get a refinance, you generally need to be current on your mortgage. Some lenders also require proof that you will be able to continue making payments. If you cannot prove you can make loan payments on time, it is unlikely that a lender will let you refinance.
In order to get a refinance, you will first need to do some research to find the best refinance rate and ask for a loan estimate from each viable lender. Lenders are generally required to provide you with an estimate within 3 days of receiving your information. The loan estimate is a document that provides details about predicted payments, loan terms, and other closing costs and fees. Compare the details to determine the best option for you. Using a refinance calculator may also be helpful. Nerdwallet provides a helpful refinance calculator and other refinance resources.
From there, you will need to shop around for the best deal, apply for a mortgage refinance (applying for about 3-5 lenders is recommended), choose a lender, lock down your interest rate, and close the deal. Steiner Law Group has relationships with experienced lenders who can assist you with this process.
Benefits of a Refinance
Obtaining a refinance will allow you to:
- Lengthen or shorten your mortgage term.
- Get a lower interest rate.
- Change your loan type (for example, if you have an FHA loan, you can refinance to get a conventional loan).
- Take a cash-out refinance-this allows you to take cash out of your equity to cover other expenses. You assume a higher-balance loan, but in exchange, you receive the difference in cash from your lender.
When You Should Get a Refinance
You should get a refinance if:
- You don’t have an underwater mortgage.
- You have other bills and expenses (for example, medical bills) that could be paid by taking a cash-out refinance.
- You are not at risk of defaulting on mortgage payments, but want to decrease monthly mortgage payments.
Loan Modification vs. Refinance: Which is For me?
The answer to the selection of loan modification vs refinance is simple: if you are defaulting on your mortgage payments and may be facing foreclosure or bankruptcy, loan modification may provide a non-bankruptcy solution. If you are in a financial pinch but have not defaulted on your mortgage payments, refinancing may be a good option for you.
The bottom line is this: if you are behind on mortgage payments or you have received a notice of intent to foreclose, a loan modification may be the only thing that will save your home without having to file for bankruptcy. And if that is the case, you will need to get a good deal to save your home. An experienced, loan modification attorney can ensure this.
Steiner Law Group is Here for You
At Steiner Law Group we are experienced in answering questions that compare loan modification vs refinance. For over a decade Steiner Law Group has been successfully helping hundreds of Maryland residents to get their finances in order and save their homes!
If you have more questions about loan modification vs refinance, foreclosure, or bankruptcy, please schedule a risk-free consultation, contact Steiner Law Group, LLC, or call us at (410) 670-7060 to learn more.