When you want to change the terms of your mortgage loan there are some options to consider. You can refinance to get a lower rate in some cases, but you may also have the option for loan modification. The difference between refinancing and loan modification is important, since you want to make the choice that’s going to be best for you. Don’t assume that you can just pick one and have success, since their different processes used for different things. In some cases you might have both options open to you and can choose the one you feel best about. In other cases you may find that you must take the option that you can work with, as the other one may not be available. Here are some important differences between the two options.
1. What does refinancing mean?
When you refinance your loan, you essentially get a new loan that pays off the old one. You can get that through the same lender, or you can choose a completely different company. Either way is acceptable, and it should come down to the rate and terms you’re getting. Essentially, you’re not refinancing the loan. You’re refinancing the house by getting a different loan. If you can get your interest rate down by at least one percentage point, refinancing may be worth doing. Some people refinance for a better interest rate and loan terms, and others do it so they can get the equity out of their house and use the cash for something else. They can make improvements, travel, pay off other debt, or spend that money any way they want to.
2. What is a loan modification?
If you can’t refinance your house because you owe more on it than it’s worth, you may be a good candidate for a loan modification. A lot of people who bought at the top of the market with very high interest rates ended up having trouble paying for their homes. Because it was believed that lenders took advantage of borrowers during that time, programs were created to let borrowers who met certain qualifications refinance their homes or modify their loans to be more realistic. That meant that buyers could have portions of their debt forgiven, their interest rates lowered, and other benefits in some cases. A loan modification changes their existing loan to provide for better terms, so they can continue to stay in their home.
3. How do you choose the right option for your needs?
Choosing the right option is important, but you may not really have much of a choice. If you owe more than your home is worth, have credit problems, and are dealing with related issues, you’ll probably need to get a loan modification. Most lenders won’t agree to refinance your home if you owe more than the value. You might be able to get a refinance if the value of your home has risen, though, or if you can pay off some of the existing loan at the time of closing on the refinanced loan. Talk to your lender about your specific situation, and ask them what kinds of options you might have. That way you can learn about your choice and pick the one that’s right for you.
4. Does your credit look good?
Having good credit can really come into play when you’re trying to refinance or modify your loan. The better your credit is, the lower the risk you present to a lender. That’s good news for you, because lenders are more likely to loan money to people they see as representing little risk to them. There may be problems with your credit that you can’t just fix, but it’s a good idea to take a careful look at your credit report. See what you can correct if there are legitimate mistakes, and also see if there’s anything you can clean up or improve upon. That will help your credit look better, which will make you more attractive to lenders. Whether you’re trying to get a refinance or a loan modification, having good credit can only help your chances.
5. Can anyone qualify?
By choosing the right loan modification or refinance option from the beginning, you’ll have a higher chance of qualifying for the loan you want to get. That’s good news if you really need the help, because it can mean that you’re able to reduce your chances of running into a problem with your current mortgage. Still, not everyone qualifies for a loan modification or a refinance. If you don’t qualify there may not be other options available to you. Work with your lender to see what they can do for you. If you don’t have success there, it may be time to talk to other lenders or to assistance agencies, so you can get a mortgage that works for you and reduce the risk that you’ll end up losing your home.
