What is the Difference Between a Loan Modification and Refinancing

application for mortgage loan modification

If you are a homeowner who is having trouble making your mortgage payments, you have many options available to you. The two that you have likely heard of the most are loan modifications and refinancing. These two terms both indicate that the actual mortgage on the home is changing, so it is natural to think that they are relatively very similar. However, there are several differences between the two. It is important to understand what these differences are, as the one you choose could determine whether or not you qualify for the option you choose, or even if you can remain in your home.

Refinancing Your Home

The main difference between refinancing your home and obtaining a loan modification through your lender is that refinancing provides you with a whole new loan. The new loan pays off the old mortgage and you repay the new loan you obtained through refinancing. Essentially, you are actually refinancing the home, not the loan. This is different than a loan modification, which actually changes the same loan you have had all along.

You can refinance with the same lender that held your old mortgage, or you can choose another lender altogether. You should make this decision based on the interest rate and other terms of the loan offer. Refinancing is generally worthwhile if you can get a loan that has an interest rate that is even just one percent lower than what you are currently paying.

There are many reasons people choose to refinance a home. Some people do it so they can get better terms on their loans, such as a lower interest rate, while others do it so they can pull more equity out of their home. By taking out equity on the home, homeowners can travel, make improvements on their home, or pay off debt.

Obtaining a Loan Modification

If you owe more on your current mortgage than the home is worth, you’re likely not eligible for refinancing, particularly if you are facing foreclosure. Instead, you can try to obtain a loan modification through your lender. This is an option typically sought out by homeowners who are facing foreclosure, as it allows a homeowner to remain in their home. Through a loan modification, the current mortgage is modified to change some of the terms.

A lender can choose to change any terms they wish. They may offer a homeowner a lower interest rate, lengthen the life of the loan so monthly payments are smaller, or they may even forgive a portion of the principal. Loan modifications are often sought by people who purchased a home in a very hot market and took out a loan that had a high-interest rate. As the market cools off, the home could lower in value, while the homeowner is still having trouble making their costly mortgage payments. In this instance, though, refinancing is still sometimes a possibility.

Which Option Is Right for You?

Knowing the difference between refinancing and getting a loan modification may not make it any easier for you to decide which one is right for your situation. However, choosing the right one is important. It is just as important to understand that in some cases, you may not be able to choose.

For example, if you owe more on your mortgage than what the home is worth, most lenders will not want to offer you a refinancing option. Also, if you have poor credit or other financial issues, refinancing may not be an option that is available. However, if your home has risen in value, or you can pay off a portion of the loan at the time of refinancing, a lender may be more open to refinancing your home.

The Importance of Good Credit

Regardless of whether you choose to refinance your home or obtain a loan modification, your credit should be as good as possible. The higher your credit score, the less of a risk you pose to the lender.

Before speaking to a lender, it is highly advised that you obtain a copy of your credit report from one of the major bureaus, such as TransUnion or Equifax. You may not be able to fix all of the issues associated with your credit report, but you may be surprised by how much you can fix. Your credit report may contain errors, or you may find small debts that you can take care of and pay off to clean up your report. This will make it much easier to obtain either a loan modification or home refinancing.

Qualifying for Refinancing or a Loan Modification

Determining whether refinancing or a loan modification is right for you will give you a much better chance of qualifying for either type. Knowing which type is right for you will also help if you are already having trouble paying your mortgage. Choosing the right option will also help ensure you do not run into trouble with your current loan.

Unfortunately, some homeowners will not qualify for either a loan modification or refinancing. If this is the case for you, there is a very real chance that you could lose your home. In these cases, it is best to speak to your lender to determine what your options are. Before you do, you should first speak to a foreclosure defense lawyer. An attorney will also outline what your options are and, if you need to speak to your lender, can offer tips on negotiating, or even communicate with your lender on your behalf. Ultimately, speaking to an attorney will reduce the risk of you losing your home.

Our Florida Foreclosure Defense Lawyers Can Help

If you are having problems making payments on your mortgage and feel that your lender may soon start foreclosure proceedings, call our Fort Lauderdale foreclosure defense attorneys at Loan Lawyers. We can also help if foreclosure proceedings have already begun. When you need help, contact us to learn what your options are, and how we can assist you through the process that is right for you. Call us today at (954) 523-HELP (4357) to schedule your free consultation with one of our attorneys.

Loan Lawyers has helped over 5,000 South Florida homeowners and consumers with their debt problems, we have saved over 2,000 homes from foreclosure, eliminated more than $100,000,000 in mortgage principal and consumer debt, and have recovered over $10,000,000 on behalf of our clients due to bank, loan servicer, and debt collector violations. Contact us for a free consultation to see how we may be able to help you.