All homeowners want lower monthly mortgage payments. In general, there are two main ways that a homeowner can go about this: mortgage refinancing or loan modification. It is important to realize that these are two very different processes. The information below explains how each of these options works.
With mortgage refinancing, you are replacing your original mortgage with a new home loan. When you refinance, you are actually getting an entirely new mortgage loan. If you decide to refinance your mortgage, you will be subject to the following:
- Credit check
- Home appraisal
- Market conditions for a mortgage rate
- Origination fees and closing costs
- Title and escrow
Your income will be verified to ensure that you can afford the new payments. If you have a low credit score or insufficient equity in your home, your mortgage refinancing application may be denied. Since it is a new loan, mortgage lenders will treat your refinance accordingly.
As with mortgage refinancing, your income must be confirmed in order to qualify for a home loan modification. However, a loan modification is not a completely new loan. A modification represents an adjustment to your current loan. That adjustment may be a lowering of the principal, though typically the adjustment is a longer loan term and/or a lower interest rate.
With a loan modification, you do not have closing costs and approval is not based on your credit score. Additionally, if you owe more than your home is worth, you can still get a loan modification. Mortgage loan modifications are especially designed for people who are in danger of foreclosure, who need to adjust the terms of their mortgage so they can afford the payments ― and avoid default.
It is important to note that mortgage loan modification comes with a trial period. After you go through the initial stages of approval for loan modification, you will have to demonstrate that you can make the new payments. If you successfully make the payments during this initial period, the loan modification can then be made permanent. (With mortgage refinancing, on the other hand, the loan terms are locked-in permanently once your new loan is approved and there is no trial period.)
Which One Is Best for You?
Whether you choose mortgage refinancing or loan modification depends on your individual situation. If you want to reduce the length of your loan term and if you are not in danger of default, mortgage refinancing might be the better option. But if you are at risk for default and you cannot qualify for a mortgage refinance, you may want to look into loan modification.