finances

Loan Modification vs. Refinance: Comparing Options

Tom BurchnellReviewed by

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

Whether you got locked into your 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 loan modification or a refinance?

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

What is a Refinance?

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

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 lower monthly payments. Thanks to the lower interest, you’ll pay less over the lifetime of your 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, the loan modification route may make more sense for you.

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 borrowers experiencing financial hardship and usually requires a hardship letter or documentation.

Banks sometimes offer loan modification to homeowners 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 your loan terms could include:

  • An adjustment to your interest rate if you’re paying more than the market rate and have qualifying credit
  • An extended loan term that gives you longer to pay back your loan
  • Partial forbearance on your loan for a set period of time, allowing you to catch up on late 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 service lender and see if they’re willing to work together.

The worst the mortgage company can say is no.

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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 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 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-leasebackDon’t want to move? That doesn’t mean you’re out of luck. EasyKnock’s solutions let you sell your home and lease it back for as long as you want, whether that’s a year or a lifetime.

Explore Your Options With EasyKnock

Whether you’re behind on your mortgage or simply looking to pay for the second home of your dream, your home equity gives you options.

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

In contrast, EasyKnock empowers you to cut the cords to your debt and use your home equity—all while staying in your current home. Visit us today to learn more about our options for homeowners.

This article is based on research and/or other relevant articles and contains trusted sources. Our goal at EasyKnock is to provide readers with up-to-date and objective resources on real estate and mortgage-related topics. Our content is written by experienced contributors in the finance and real-estate space and all articles undergo an in-depth review process.

Sources: 

  1. Freddie Mac. Understanding the costs of refinancing. https://myhome.freddiemac.com/refinancing/costs-of-refinancing.html
  2. Housing and Urban Development. Avoiding foreclosure. https://www.hud.gov/topics/avoiding_foreclosure
Tom Burchnell
Product Marketing Director

Tom Burchnell, Director of Digital Product Marketing for EasyKnock, holds an MBA & BBA in Marketing from University of Georgia and has 6 years of experience in real estate and finance. In his previous work, he spent time working with one of the largest direct lenders in the SouthEast. 

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