If you are having trouble making your mortgage payments, you may consider options to lower your monthly due amounts. Otherwise, you could risk foreclosure. You may have heard of home loan modification and wonder if it entails refinancing your mortgage.
While it is true that refinancing and modifying your mortgage could potentially lower your payments, these two concepts are not the same.
How mortgage refinancing works
When you refinance your home loan, you take out an entirely new loan to pay off your existing mortgage. This allows you to change the interest rate, loan term and other details to hopefully get a lower monthly payment.
Refinancing requires submitting a new loan application and getting approved based on your credit, income and other qualifications. Closing costs can also factor into the process.
The workings of mortgage modification
Modifying your home loan does not involve getting a new loan. Instead, you just alter the terms of your current mortgage. Common modifications include extending the repayment term, reducing the interest rate or adding missed payments to the end of the loan term.
To get a modification, you will need to contact your lender, explain your financial hardship and provide documentation to back up your situation. If approved, you will sign paperwork to officially change the terms on your current mortgage.
When loan modification is the better option
For struggling homeowners, mortgage modification may offer some advantages over refinancing. You do not need to qualify and get approved for a brand new loan. If your credit or income has taken a hit, it may be difficult to get approved to refinance.
In addition, you avoid closing costs, which can be thousands of dollars with a loan refinance. Modification still involves paperwork but no major fees. Furthermore, if rates are high when you need help, sticking with your existing rate through a modification could be better than refinancing at a higher rate.
If you are facing financial hardship and need to adjust your mortgage, exploring a modification with your lender could be a valuable first step. Given the various options available, you should be able to find a solution to help your specific situation.
