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 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 loan servicer than a refinance. In this short guide, we’ll cover the basics of mortgage modification vs refinance 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.
Almost all refinances come with closing costs and documents similar to those that you paid during closing. These include:
- An appraisal fee
- Recording costs
- 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, 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 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
- 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 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 loan servicer or 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 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.
- 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. 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 while staying in your current home. Visit us today to learn more about our options for any homeowner concern.
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, including possibly using EasyKnock’s sale-leaseback programs before you decide on your next step.
- Freddie Mac. Understanding the costs of refinancing. https://myhome.freddiemac.com/refinancing/costs-of-refinancing.html
- Housing and Urban Development. Avoiding foreclosure. https://www.hud.gov/topics/avoiding_foreclosure