Loan modification or refinancing: how to decide
Our goal is to give you the tools and the confidence you need to improve your finances. While we do receive compensation from our partner lenders, whom we will always identify, all opinions are ours. Credible Operations, Inc. NMLS # 1681276, is referred to herein as “Credible”.
The 2019 Survey of Consumer Finances found that about 30% of homeowners have less than $ 14,000 in assets to cover an unexpected drop in income.
If the pandemic and its economic fallout have decimated your emergency fund, cutting your housing expenses may be more necessary than ever.
Loan modifications and refinancing are two ways homeowners can reduce their monthly mortgage payments.
Find out how a loan modification and refinancing are different, and find out which option is best for you:
What is a loan modification?
A loan modification changes the terms of your mortgage to make monthly payments more affordable. It is a strategy to avoid foreclosure if you are having financial difficulties that are preventing you from paying your mortgage.
If you are interested in a home loan modification, you will need to talk to your loan officer. This is the company you send your mortgage payments to, and they are the only ones that can change your loan.
If you are eligible for a loan modification, your loan manager may agree to one or more of these changes:
- Lower interest rates
- Extension of the loan term
- Change of loan type
- Main reduction
What is mortgage refinancing?
A mortgage refinancing replace your current home loan with a new one, and you don’t have to refinance with your current lender – you can shop around.
Plus, unlike a loan modification, homeowners hoping to refinance won’t have to show they are in financial difficulty or are at risk of foreclosure.
In fact, it’s quite the opposite: Unless you have a VA or FHA loan and refinance with the same type of loan, you will need to qualify and demonstrate that you can pay off the new loan. Generally, you will also need to be up to date on your mortgage.
With refinancing rate so low, now’s a great time to consider getting a new mortgage, and Credible can help you find great rates. You can compare the prequalified rates of our partner lenders without affecting your credit score, all by filling out a simple form.
When a loan modification makes sense
Loan modifications are best if you are:
- Late on monthly payments
- Underwater on your mortgage
Lending services typically only approve loan modifications as an emergency measure for borrowers vulnerable to foreclosure.
An owner can find himself in this situation if he has lost his job, has had his hours reduced, if he has not been able to work due to babysitting responsibilities, or if he has suffered an illness or injury. serious injury.
Another circumstance that can cause difficulties for homeowners is having a adjustable rate mortgage whose rate has increased, making the monthly payment unaffordable.
It makes sense to consider applying for a loan modification if you are having financial problems and don’t want to lose your home.
Here’s how a loan modification might help:
- It could be faster than refinancing. One of the nation’s largest mortgage lenders, Wells Fargo, says it typically gives homeowners a loan modification decision within 30 days after you provide them with the necessary paperwork. Refinance a house usually takes six to eight weeks.
- You could end up with the equity in your home for free. While this outcome is highly unlikely, if your loan manager reduces your loan principal, you will increase your home equity. However, debt forgiveness may be subject to income tax.
Modifying your mortgage may be your best option to avoid delinquency or foreclosure, but it could still have negative consequences.
Here are some drawbacks to modifying your home loan:
- It could lower your credit score. Your loan officer can report the loan modification to the credit bureaus. Because a loan modification shows that you are having financial difficulties, it could lower your score. The effect, however, will be less severe than a foreclosure.
- You cannot withdraw money. If your mortgage isn’t the only expense you’re struggling to pay, a loan modification may not solve all of your problems, although the money freed up through a modified monthly payment can help.
When refinancing makes sense
Refinancing is best if you:
- Have some equity in your home
- Are generally in good financial health
- Want to save money by getting a lower mortgage rate
Because refinancing requires you to get a new mortgage, you’ll have to pay closing costs.
Getting quotes through Credible can help you calculate a preliminary breakeven point and decide if you want to continue. You can compare the current rates of our partner lenders using the table below.
Refinancing requires gathering documents and going through the loan process, but the potential savings can be worth it.
Here are some key advantages of refinancing over loan modification:
- You can shop. The loan modification may not give you a lot of options because you are limited to what your loan officer offers you. Refinancing gives you the opportunity to get quotes from several lenders who know they are competing to give you the best deal.
- You can withdraw money. With a refinancing with limited withdrawal, you could get up to $ 2,000 in cash back on closing. And if you have enough equity, you can refuel refinancing of collection and get a lot more. With the latter, you can use the money however you want, and it might help you better deal with additional financial challenges unrelated to your mortgage payment.
- It will not count as a debt settlement. Your lender will not forgive the money you owe when you refinance.
For some homeowners who need financial assistance, refinancing may not be the right option.
These disadvantages of refinancing could make loan modification a better choice:
- It is more difficult to qualify. Lenders will want to see that your debt-to-income ratio and your credit rating make you a financially strong candidate to pay off a new mortgage.
- It may take longer. If you’re about to miss your next mortgage payment, refinancing may not help you quickly enough. The average time to refinance a mortgage in October 2020 was 57 days according to Ellie Mae, a provider of technological solutions for the mortgage industry.
Want a short-term alternative to loan modifications and refinancing?
Loan modification and refinancing are not the only ways to find relief from your mortgage payments. If you are in a difficult financial situation, you can find out about mortgage forbearance as a short term strategy to avoid foreclosure.
Forbearance gives you a temporary break in your mortgage payments or lets you pay less for a few months. You will need to make the payments later.
From March to June 2020, around 5.6% of homeowners took advantage of mortgage forbearance to stay afloat.
Which method of modifying your mortgage payments would be most helpful to you?
|Potential solution||Better if …|
|Loan modification||You are experiencing major financial difficulties and you need a long term solution to help you stay in your home.|
|Mortgage refinancing||Your income and credit are good enough to qualify for a new mortgage at a lower rate, and you plan to stay in your home beyond breakeven point.|
|Mortgage forbearance||You are experiencing short-term financial difficulties, such as lost income from a pandemic.|