Refinancing and Loan Modification Compared

Refinancing and loan modification are two ways in which homeowners can lower their monthly mortgage payments. Some homeowners wish to lower their mortgage payments in order to have extra money for other expenses, while others must lower their monthly mortgage payments to avoid foreclosure and remain in their homes. Though refinancing and loan modification have different requirements, pros and cons, both initiatives share the same objective: to lower a homeowner’s mortgage payment.

Refinancing Your Mortgage
When you refinance your mortgage, you replace your existing home loan with a new loan with a different interest rate and/or term. For instance, if you borrowed your current mortgage when home interest rates were high, you could refinance your loan years later if rates decrease. Or, if your existing mortgage is an ARM (Adjustable Rate Mortgage), and your interest rate is steadily rising due to current market conditions, you can refinance your home loan to a Fixed Rate Mortgage to lock in an unchanging, lower rate.

Pros and Cons of Refinancing
The upsides of refinancing include lowering your monthly mortgage payment and reducing your loan term (thus reducing overall interest payments). Some homeowners choose to refinance their mortgages to get extra money to pay off other debts.

The downsides of refinancing include high up-front fees, including repayment of closing costs and an in-depth application process. If your home loan has high closing costs, you may want to consider loan modification over refinancing. 

Another downside of refinancing is that it often resets the loan term, or extends the life of your loan. Doing so increases the amount of interest you’ll have to pay on your mortgage. For instance, if you are three years away from paying off your 15-year mortgage, but you decide to refinance to get extra cash, you could potentially extend your loan’s payoff date from three years to, say, seven years. Even though refinancing will lower your monthly payment, extending your loan term will result in more accrued interest payments over time.

Modifying Your Loan
Refinancing involves replacing your existing loan with a new one. Loan modification, by contrast, involves simply changing your current mortgage to make the payments more affordable.

Pros and Cons of Loan Modification
Loan modification is faster and easier to receive than refinancing, which requires more paperwork and a higher credit score. It’s also the cheaper option in that you do not repay closing costs with a loan modification.

The main downside to loan modification is that, unlike refinancing, it is a temporary solution. After a few years at the lower, modified interest rate, the rate often rises to a set maximum rate. In other words, loan modification will lower your monthly mortgage payment for around five years; refinancing, however, permanently reduces your loan’s interest rate.

Will I Qualify?
In general, to qualify for refinancing, the homeowner must have a good credit score and be current on his or her mortgage payment. Most lenders recommend loan modification to homeowners who need to quickly lower their mortgage payment, or for those who cannot qualify for or afford to refinance. Unlike with refinancing, homeowners who have missed one or two mortgage payments may still be able to qualify for loan modification.