What's the Difference Between Refinancing and Loan Modifications?

Unfortunately, your mortgage payment is one of those non-negotiable monthly payments that you can’t cut back on even when you really can’t afford it any longer. Many options including loan modification are open for homeowners in this position, and the aim of this article is to explain the basics of the loan modification program and what’s the difference between refinancing and loan modification.

Loan modification is the process of reworking the mortgage contract in order to lower the monthly payment. When performing modifications, lenders sometimes lower interest rates, let homeowners pay interest-only amounts for a specified period. forgive past due amounts and tack them on to the loan principal. In some rare cases they may forgive actual loan principal, but this is not common. Every lender has specific procedures and policies regarding who is eligible for loan modification, but in general you must:

1) be paying over a certain percentage of your gross monthly income in mortgage payments;

2) have experienced some recent identifiable financial catastrophe such as job loss or emergency medical bills; and

3) be in danger of defaulting or have already become delinquent on the mortgage loan.

Refinancing, on the other hand, is the process of replacing your home mortgage with a completely new one. The new mortgage can be through any lender that you chose. People often refinance when interest rates have fallen since they took out their original mortgage, they are ready to switch from an ARM to a fixed-rate mortgage, or they want to get cash from their home’s equity.

People need to get approval from their lender before they can seek refinancing, and sometimes they may not qualify. To get a new mortgage loan, people will need to demonstrate decent credit and sufficient home equity. If they have a negative amortization loan or if their house is worth less than what they owe on the mortgage, they probably won’t be eligible for refinancing. Poor credit will also usually bar someone from being able to refinance.

So how does refinancing compare to loan modification? Refinancing is getting an entirely new mortgage loan, either with your existing lender or another company. Loan modification is the adjustment of loan terms on the existing loan with your current provider. Keep the following points in mind when trying to decide whether a refinance or a loan modification is right for you:

• There are typical closing costs and points charges involved in a refinance, making it slightly more costly for a homeowner to obtain refinancing than a loan modification. (Typically, refinancing costs between 3% and 6% of your outstanding principal.)
• Loan modification requires that you have experienced some type of financial windfall such as income loss, natural disaster, disability, or divorce. If you can’t point to a specific hardship that made it impossible for you to continue mortgage payments, you won’t qualify for loan modification.
• Refinancing requires an appraisal of the home’s value and has a minimum credit score and home equity requirement. Loan modification does not have anything to do with your credit score, home value, or home equity. In fact, having lost equity due to falling house prices actually works in your favor for a loan modification.

When you call your lender to ask about your options, they will most likely suggest that you try refinancing before loan modification, if possible. The lender takes somewhat of a hit when they modify a loan, so they’d like to use that as a last resort only to avoid foreclosure.

There are two main ways to get the support you need before you approach your lender. Find a trustworthy financial consultant or advisor with a proven track record of helping homeowners, one who can help you state your particular case and understand exactly what your needs are.

For more essential tips and more details about Loan Modifications - visit my simple, no nonsense loan modification guide and resource: http://Home-Loan-Modifications.info