Mortgage refinance rates have been at their lowest levels for years; however, millions of homeowners that could benefit from lowering their payment amount still have not refinanced. There are a number of reasons for procrastinating when it comes to mortgage refinancing; not understanding the difference between refinance and loan modification could be one.
Mortgage Refinancing vs. Loan Modification
Mortgage refinancing involves taking out a new home loan from your existing lender or a new one to pay off your old loan. With loan modification your existing lender changes the terms of your existing home loan to allow for a lower payment amount. Common loan modifications involve lowering the interest rate; however, you could lengthen your term or have the amount owed reduced.
Mortgage refinancing involves taking out a brand-new home loan and all of the fees that go along with it. Loan modification is done to avoid foreclosure. You will be required to prove that you can afford the payments to qualify for either one.
Mortgage Refinancing Advantages
Refinancing your home makes sense if you’re able to recoup your expenses by lowering your monthly payment. Mortgage refinancing does not have any impact on your credit; however, a loan modification can damage your credit score. Mortgage refinancing is relatively straight forward, whereas loan modifications are complicated and time consuming. If you’re considering a loan modification instead of refinancing you’re completely at the mercy of your existing lender.
Qualifying Can Be Tricky
Your ability to refinance your home depends on your credit score and loan-to-value ratio. If you’re underwater in your existing home or have poor credit mortgage refinancing can be tricky. Loan modifications are not based on your credit score or being underwater. Loan modifications are often in the lender’s best interest to help avoid losses associated with foreclosing on the home.
If you can qualify for mortgage refinancing it’s going to be a more attractive option than loan modification simply because the modification will damage your credit. The test of how good of a deal you’re getting on your refi comes down to the fees you pay at closing. The less you pay, the more you’ll benefit from today’s low refinance mortgage rates.