Home Equity

Loan Modification vs. Refinance: Comparing Options

June 21, 2021

Is your monthly mortgage payment higher than you’d like it to be? If so, you’re likely weighing a mortgage loan modification vs. refinance. Read on as we compare the options.

Whether you got locked into your current mortgage at a very high interest rate or you’re simply trying to free up cash for another financial goal, it’s reasonable to want a better deal on your home mortgage loan.

So, which is better, a new loan modification or a refinance?

While a change to your existing loan situation can have beneficial effects, it’s harder to secure with your loan servicer than a refinance. In this short guide, we’ll cover the basics of mortgage modification vs refinance and the other options to lower monthly payment costs.

What Is a Refinance?

A mortgage refinance is one of the types of refinance options that puts an end to your existing mortgage loan and replaces it with a mortgage under new terms.

Before you pursue this option, make sure you understand the pros and cons of mortgage refinancing. Refinances can be a great option in several circumstances:

You qualify for a lower interest rate – If you have proof that you’re paying above the current market rate on your interest, you may be able to get a better deal that results in a lower monthly payment. Thanks to the lower interest, you’ll pay less over the lifetime of your home loan.
You want to take cash out – If you’ve built equity in your home, a cash-out refinance lets you take out spending money against your home equity. While you’ll owe more money on your new mortgage, you’ll be able to use the cash for home renovations, paying off high-interest debt, or any other goals.

Keep in mind that attempting a refinance with bad credit and late payments is very difficult. Even if you can secure a refinance, you’ll likely pay a high interest rate and ultimately add to your debt burden—even if you don’t take cash out.

Why?

Almost all refinances come with closing costs and documents similar to those that you paid during closing. These include:

An appraisal fee
Recording costs
Taxes
Underwriting fees

Even if you’re paying less interest over the lifetime of your loan, your closing costs could add $5,000 or more to your outstanding debt. Before taking out a refinance, research your breakeven point (the point at which you begin saving money).

If that’s in the distant future, refinancing may not be right for you at this point in your life. In which case, you can also consider a mortgage recast vs. refinance. Or, loan modification options may make more sense for you, as the borrower.

What Is a Loan Modification?

A loan modification is what it sounds like—a modification to your existing loan (rather than a new loan through refinancing).

A loan modification should not come with closing costs, which can make it sound more attractive than refinancing. But keep in mind that this option type is usually reserved for a borrower experiencing financial hardship and usually requires a financial hardship letter or documentation.

Banks sometimes offer mortgage loan modification options to a homeowner in the instance that they are ineligible for refinancing and are having trouble making payments on their loans.

So, what is a mortgage modification, practically speaking? Potential changes to the loan term could include:

An adjustment to your interest rate if you’re paying more than the market rate and have a qualifying credit score on your credit report
An extended loan term that gives you longer to pay back your loan
Partial mortgage forbearance on your loan for a set period of time, allowing you to catch up on accumulated missed payments.

Keep in mind that your lender has complete discretion and advantage in deciding whether or not to approve a loan modification request.

If you’re looking for ways to catch up on your past-due balance and avoid foreclosure, contact your loan servicer or mortgage lender and see if they’re willing to work together.

The worst the mortgage company can say is no.

Other Options for Lowering Your Mortgage Payments

When it comes to mortgage modification vs refinance, the right fit depends on your credit score, current income documentation, job status, and a mortgage lender’s willingness to grant you an affordable mortgage rate.

The most important question to consider is what you hope to accomplish. If your main goal is lowering your mortgage loan payments, there are other options.

These include:

Paying a large amount of the principal balance – As an example, if you have assets (jewelry, a second car, etc.), liquidating your possessions and putting the cash towards your home loan will result in lower monthly payments.
Selling your home – If your home is too expensive and you’d like to move, you could always sell and downgrade to a smaller property or more affordable rental.
Sale-leaseback – Don’t want to move? That doesn’t mean you’re out of luck. Sale-leaseback solutions let you sell your home and lease it back, all without the need of a real estate agent.

Explore Your Options

Whether you’re behind on your mortgage or simply looking into financing a second home of your dreams, your home equity gives you options.

For mortgage loan borrowers, loan modification and mortgage refinancing can both help you lower your costs—but keep in mind you’ll still have mortgage debt to pay off.

In contrast, sale-leaseback solutions empower you to cut the cords to your debt and use your home equity while staying in your current home.

Key Takeaways

If your monthly mortgage payment is higher than you’d like it to be and are weighing a mortgage loan modification vs. refinance, it’s important to have the full picture of both options. Talk to a financial advisor about all your options before you decide on your next step.

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