Mꦓortgage Modification vs. Refinance: An Overview

Changing the terms of your mortgage could lower your interest rate, reduce your monthly payment, or give you more time to repay the loan. Mortgage modification and mortgage refinancing can both accomplish that, although they don't work in the same way. If you want or need to make a change to your loan terms, it's helpful to understand how the two compare.

Understanding Mortgage Modification

In a mortgage modification, your lender agrees to change to your loan terms. Here's an overview of how it works.

Definition and Purpose

A loan modification is an agreement between a lender and a borrower to change the terms of a loan. In the case of mortgages, its purpose is to help homeowners who are having difficulty making their regular mortgage payments avoid 澳洲幸运5官方开奖结果体彩网:foreclosure. This process is sometimes referred to as "loss mitigation."

Qualifying for a mortgage modi🃏fication could allow yoꦦu to:

• Extend your loan repayment period, with the option to make additional payments to pay the loan off earlier if there's a substantial improvement in your financial situation.
• Reduce your interest rate, which can lower monthly payments and cut the total amount of interest you'll pay on the loan.
• Convert an 澳洲幸运5官方开奖结果体彩网:adjustable-rate mortgage (ARM) to a fixed-rate mortgage, allowing for more predictability in calculating monthly payments.
• Reduce the principal balance owed on the loan so that you have less to pay back.

Mortgage modification is not a new concept, but it received renewed attention following the 2008 financial crisis. The Treasury Department established the 澳洲幸运5官方开奖结果体彩网:Troubled As𒆙set Relief Program (TARP) to stabilize the economy and provide help to struggling homeowners who found themselves 澳洲幸运5官方开奖结果体彩网:underwater (owing more on their mortgages than their homes were worth) and facing foreclosure.

Eligibility Criteria

Lenders determine when to offer mortgage modification as an option to homeoಞwners and who qualifies. Eligibility requirements vary, but typically, you must:

• Have missed at least one payment on your mortgage or be in danger of missing your next payment.
• Be able to demonstrate a financial hardship that's preventing you from making your payments, such as an illness that keeps you from working or a job loss.
• Live in the home and use it as your primary residence.

Government-backed mortgage programs may have additional requirement♉s you must meet for a loan modification. Examples of government-backed home loans include FHA loans, USDA loans, VA loans, and conventional loans backed by Fannie Mae or✨ Freddie Mac.

Pros and Cons

Modifying a mortgage can help struggling homeowners, but there are some potential downsides. In terms of what's good about mortgage modification vs. a refinance, modifying your loan could:

• Make your payments more affordable so that you're less likely to default or end up in foreclosure.
• Give you more time to pay off the mortgage while also saving money on interest.
• Allow you to stay in your home if you're experiencing a major financial hardship that affects your ability to pay everyday expenses.

Now, is a mortgage modification a perfect solution? No, as it can be difficult to qualify for one and not all lenders offer modification programs. If one is available, modifying your mortgage won't insulate you from credit score damage if you've already fallen behind on payments. Until the modification is complete, your lender ♔could still attempt to foreclose, and extending your loan term could result in paying more interest total.

Understanding a Mortgage Refinance

Mortgage refinancing is another possibility you might consider if you want to change your loan terms. You'll need to be able to qualify for a new loan which typically means meeting 澳洲幸运5官方开奖结果体彩网:minimum credit score, income, and 澳洲幸运5官方开奖结果体彩网:debt-to-income (DTI) ratio requirements.

Definition and Purpose

Refinancing means replacing an existing loan with a new one. When you 澳洲幸运5官方开奖结果体彩网:refinance a mortgage, you get a new home loan that pays off the one you already have. Going forward, you make payments on the new loan.⭕

There are a number of reasons that you mig꧋ht wa💎nt to refinance. Refinancing could allow you to:

• Get a lower interest rate, if interest rates have declined or your credit has improved since you took out your current mortgage
• Extend your loan payment term and reduce monthly payments
• Pull equity out of your home in cash

Using an online 澳洲幸运5官方开奖结果体彩网:mortgage calculator can help you estimate what your new payments would likely be if you were to re💝place your existing loan. You can also calculate what you'lꩵl save in interest if you qualify for a lower rate.

Types of Refinance Loans

Lenders offer several types of mortgage refinancing. Two major categories are cash꧃-out refinance loans vs. no cash-out refinance loans.

• 澳洲幸运5官方开奖结果体彩网:Cash-out refinance loans allow you to pull some of your home equity out in cash. However, that leaves you with a larger mortgage balance to repay.
• No cash-out refinance loans give you a new mortgage with different terms, but none of your equity is withdrawn. This may also be referred to as a rate and term refinance loan.

Government-backed loans—including FHA, VA, and USDA loans—can have their own refinance programs. A "cash-in refinance" is a less common option that allows you to replace your current loan with a new one and pay down some of the principal on the mortgage in a lump sum at closing. This type of loan can help you build equity faster.

Pros and Cons

Refinancing a mortgage can offer some of the same benefits as a modification if you're interested in changing your loan terms. That can include a lower interest rate or longer repayment term.

Here are some of the other benefits of 澳洲幸运5官方开奖结果体彩网:mortgage refinancing:

• You might save significantly on interest if you're able to qualify for the lowest rates available.
• You don't need to be experiencing financial hardship to qualify.
• You may be able to eliminate 澳洲幸运5官方开奖结果体彩网:private mortgage insurance (PMI).

Refinancing becomes less attractive if you've already paid down most of your mortgage, since your interest savings will be lower. If you have poor credit you might have a hard time qualifying for a refinance loan at favorable terms. A cash-out refinance could strain your budget if the amount of equity you withdraw results in a significantly larger loan.

Key Differences

Mortgage modi꧙fication and refinancing are designed to help homeowners in very different situations. Here are some ♊of the key points to know about how they compare.

• Mortgage modification does not replace your existing mortgage. Refinancing does.
• Modifying a mortgage may allow you to extend repayment terms up to 40 years, while a refinance loan typically maxes out at 30 years.
• Refinancing usually involves paying closing costs. Mortgage modifications do not because you're not applying for a new loan.
• A modification may reduce your principal loan balance, while refinancing is typically intended to change your rate or repayment term or allow you to pull out equity in cash.
  

Financial Implications of Each Option

The main goal of a mortgage modification is to make your home loan more affordable. Again, that's achieved by either changing your repayment term, lowering the interest rate, reducing what you owe, or a combination of those actions. Refinancing can make your loan more affordable as well if you get a lower interest rate, but you may have other goals in mind, such as cashing out a portion of your equity or switching to a shorter term so you can pay your mortgage off sooner.

In either case, lowering the interest rate could reduce the total interest you pay over the life of the loan. How much you save on interest depends on whether you're extending your mortgage term when modifying or refinancing the loan. The longer you pay on the loan, the more interest you'll pay.

As far as credit score impacts go, a modification could help your score and hurt it. If you're able to keep up with your payments going forward, that can help your credit since payment history carries the most weight in the widely used FICO scoring model. However, that won't erase any late payments on your credit reports if you fell behind on payments before the modification.

Likewise, refinancing can some negative impacts on your score, although they are relatively small. When you apply for a new mortgage, the lender may make a 澳洲幸运5官方开奖结果体彩网:hard inquiry on your credit reports, possibly taking a few points off your score. If the new loan has a higher balance, such as in a cash-out refi, that could also affect your score by increasing your total debt level. However, these impacts are temporary and as long as you continue to make on-time payments your score will rebound.

The Process of Applying for Mortgage🌞 Modification and Refinancing

Getting a mortgage modification vs. a refinance loan has different steps. If you've decided which one you'd like to pursue here is what to expect.

Mortgage Modification Process

If you're interested in a mortgage modification you'll first need to organize your documentation. Specifically, you'll need evidence of financial hardship and information about your financial situation. The types of documents your lender may ask for include:

• A letter explaining the nature of the hardship
• Recent pay stubs
• Bank statements
• Copies of your most recent tax return
• Medical bills, if your hardship is related to an illness or other health condition
• A letter of approval for unemployment benefits if you were laid off

Applying for a modification is the next step. If your lender offers mortgage modifications you may be able to complete the application online. Again, you'll need to thoroughly explain the circumstances of your hardship and upload any required supporting documentation.

After you apply, your lender may have you make aꦑ series of trial or test payments to confirm your ability to repay your mortgage under the new terms. Once you complete these test payments🧔, your lender can confirm the modification plan and your new repayment terms.

Mortgage Refinance Process

If you'd like to refinance your mortgage, c💙omparing current refinance rates from different lenders is a good place to start the process. You can run those rates through a mortgage calculator to estimate your savings and determine if it makes sense to get a new loan.

Next, you'll need to organize your paperwork. You'll likely need to have:

• Bank statements
• Investment account statements
• Recent pay stubs
• Recent tax returns

With many lenders you can apply online and upload any requested documents to the lender's website. The lender will require an appraisal, which you must pay for. An inspection is usually optional, but if you choose to have one done, you'll pay for it as well.

The lender will review your application and documentation, along with the appraisal. If approved, you'll need to prepare to pay the required closing costs on the loan and sign the new paperwork. If you're refinancing to pull out some of your equity, you'll receive that cash at closing.

Mortgage Modification vs. Refin෴ance: Which One Is Right 🦩for You?

While mortgage modification 🍷and mortgage refinancing can achieve some of the same ends, they serve two different types of homeowners.

Modification might be appropriate if you:

• Are having trouble keeping up with your monthly payments because of a job loss, illness, or some other type of financial hardship.
• Want to change your existing loan instead of applying for a new one to avoid having to pay closing costs.
• Can afford to make the new payments the lender proposes for the modification.
• Aren't trying to pull equity out of the home.

On the other hand, mortgage refinancin♓g may be a smart move if you:

• Have good credit and will qualify for a loan with an attractive interest rate.
• Want to pull equity out of your home in cash.
• Need to remove a co-borrower spouse from the loan because you're getting divorced.
• Would like to change from a variable to a fixed-rate loan (or vice versa) or want to choose a shorter or longer mortgage term.
• Have cash available to cover closing costs.

The Bottom Line

A mortgage modification is meant to help homeowners who are at risk of falling behind on loan payments or, worse, facing foreclosure. Refinancing assumes a different set of circumsta🌳nces, namely, a homeowner who simply wants to get better or different terms on their mortgage. Understanding which category you fall into and what your financial goals are can help you decide when to choose mortgage modification vs. refinancing, or vice versa.