While loan modification and mortgage refinancing typically set out to achieve the same goal of reducing your monthly payments, your decision to choose one over the other will depend on your personal circumstances. This article will take a closer look at each option to help you make an informed decision regarding your home loan.
What Is A Loan Modification?
A loan modification involves changing the original terms of your mortgage loan. This can take several forms and usually involves one of the following:
- An extension of the loan term
- A reduction in the rate of interest
- A reduction in the principal amount owed
- A change in the loan type. For example, from a floating rate to a fixed-rate mortgage or vice versa.
Lenders typically grant loan modifications in situations of financial hardship where the borrower cannot meet their monthly payments or is in danger of defaulting on their loan. Suppose you are having difficulty making your monthly mortgage payments. In that case, it is worth consulting a legal expert such as this Loan Modification Lawyer in Fort Lauderdale, who can advise you on your eligibility for a loan modification.
As a loan modification can have a negative impact on your credit score, it is only advisable to request one if you are facing some form of financial hardship, such as being in arrears on your mortgage or anticipating difficulties in making future mortgage payments. Loan modifications are often proactively sought by borrowers who are facing foreclosure on their homes due to financial challenges. If the lender agrees to more favorable loan terms, the borrower can often save their home from repossession.
What Is Mortgage Refinancing?
Unlike a loan modification, which modifies the terms of an existing loan, refinancing will replace the mortgage loan with a completely new one. A homeowner may choose to refinance their mortgage in the following situations:
- To receive a lower interest rate.
- To reduce monthly payments. This can be achieved through extending the loan term and spreading the payments over a longer period.
- To increase monthly payments. Conversely, a loan term may be shortened, increasing the amounts owed each month. This will pay off the mortgage sooner and reduce the amount of interest paid in the long run. As many mortgages contain prepayment penalties, refinancing may be a sensible option for those wanting to pay off their mortgage early.
- To take cash out of your home. This type of refinance arrangement, known as ‘cash-out refinancing,’ allows homeowners to draw money out of the equity on their home. This is a way to access cash for expenses such as home renovations by replacing an existing mortgage with a larger loan. For example, if your home is worth $250,000 and has a $100,000 mortgage, you have $150,000 in equity. By refinancing your mortgage, you may be able to take out a portion of the equity in cash. If $40,000 is taken, it will be added to the old mortgage and replaced with a new balance of $140,000.
Loan modifications and mortgage refinancing both offer valuable options for homeowners. Depending on their individual circumstances, one or both of these options may be available to them, allowing them greater financial flexibility and freedom.