Mortgage Modification vs Refinancing

Mortgage modification is the process of permanently redefining the terms of your original home loan. It is an alternative to refinancing your home loan, which is when you actually get rid of your original home loan and borrow a new one. Home mortgage modification is a way of saving yourself, and your lender, from foreclosure or bankruptcy when your situation has made it impossible for you to make payments. Mortgage refinancing is a way to improve the terms of your loan when your situation has changed for the better.

Specifics of Modification

In order to modify your existing loan, you must make a plea to your lender. The lender does not want you to default on a loan because then it will suffer as well. The lender will take steps to assure that your payments can be made. If the lender accepts the explanation of your situation, then there are many options to choose from that will make your loan more affordable.

  • The lender can allow you to miss a few monthly payments if you promise to make the payments at the end of the term of the loan. This agreement is a good option if you are currently having money problems but are confident that you will have adequate finances in the future.
  • The lender can extend the term of your loan. This would keep the total amount that you pay over the total time the same, but your monthly payments would decrease. If you have a cash flow problem, this option is for you.
  • The bank can lower your interest rate. This would lower your monthly payments, but you would need to pay for a longer period of time.

Specific of Refinancing

When you negotiate a new loan, you are really paying off your old loan with the new money that you are borrowing. You make all of your payments to the new lender on the new loan because the old loan no longer exists. You should consider refinancing your home loan if, when you originally obtained the loan, you were in a worse off financial situation than you currently are.

  • If your credit score has improved significantly since you purchased your original loan, refinancing will allow you to qualify for better rates. You are no longer as high a risk to the lender, therefore the lender will offer you a better deal.
  • If you have a fixed rate loan and the market interest rate has dropped, refinancing can provide you with a loan that meets the new market rate.  Your monthly payments will decrease.
  • If you have an adjustable rate mortgage and the market interest rate is projected to decrease, switching to a fixed rate will allow you to lock in the low rate while avoiding the uncertainty of future increases.