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6 min read Feb 08, 2024

Loan Modification Vs. Refinance: Which One Is Good for You?

The mortgage default rate in Q3 2023 was 3.62%. Many of these mortgage delinquencies led to a foreclosure, around 100,546 properties filed for foreclosure in 2023.

Any untoward life incident can affect your ability to pay your mortgage payments. To avoid foreclosure, homeowners usually have two options, refinance or loan modification.

With mortgage rates rising, refinance can’t be seen as a fruitful option. Homeowners can explore loan modification options, to make the loan more manageable.

⚡Loan Modification vs. Refinance

  • As of January 2024, the average 30-year and 15-year fixed mortgage APR for refinance is 6.17% and 5.34%, respectively.
  • To get your loan modified, lender will ask for a proof of your financial hardship before considering your application.
  • Refinancing has costs associated with it, these costs amount to around 6% of the total loan amount.

What Is a Loan Modification?

A loan modification is a change made to the terms of an existing loan. This involves a reduction in the interest rate, an extension of the loan term, or a change in the type of loan.

Loan modification aims to help borrowers who are struggling to make mortgage payments and are at risk of default. With loan modification, the monthly payments are made more affordable and sustainable for the borrower.

It’s important to note that loan modifications are typically only available to borrowers experiencing financial hardship, such as a job loss, medical emergency, or other unexpected expenses.

When Can You Request a Loan Modification?

Here are some situations where a loan modification can be requested:

  1. Financial Hardship: If you are experiencing financial hardship, such as a job loss, or illness, a loan modification may be a good option.
  2. Underwater Mortgage: If you owe more on your mortgage than your home’s current worth, a loan modification can help you reduce your principal balance and make your payments more affordable.
  3. Adjustable-Rate Mortgage: If you have an adjustable-rate mortgage (ARM) and interest rates are increasing, you should opt for a loan modification. This will help you lock the loan at a lower interest rate and reduce your monthly payments.

How to Modify Your Loan?

Here is a stepwise guide to apply for a loan modification:

  1. Contact Your Lender: The first step is to contact your lender and make them aware of your financial hardships. Your lender may be willing to work with you to find a solution that works for both parties.
  2. Gather Documentation: Your lender will likely ask you to provide proof of your financial constrain, such as proof of income, bank statements, and tax returns.
  3. Submit an Application: Your lender will provide you with a loan modification application that you will need to fill out and submit.
  4. Wait for Approval: Once you have submitted your application, your lender will review your financial situation and determine whether a loan modification is possible.
  5. Review Loan Terms: If your lender approves your loan modification, they will offer you new loan terms. Make sure you review these terms carefully and understand the new payment schedule.
  6. Sign the New Loan Agreement: Once you agree with the new loan terms, sign the new loan agreement to finalize the loan modification.

What Does It Mean to Refinance Your Mortgage?

Refinancing your mortgage means taking out a new loan to replace your existing mortgage. Essentially, you’re paying off your old mortgage with a new one.

Moreover, the new mortgage will have different terms, such as a new interest rate, loan term, and monthly payment amount.

The primary goal of refinancing a mortgage is usually to obtain a lower interest rate, which can lead to lower monthly payments.

When Should You Refinance?

Here are some situations where refinancing may be a good idea:

  1. Lower Interest Rates: If interest rates have dropped since you obtained your original mortgage, refinancing may be a good option.
  2. Shorter Loan Term: If you can afford higher monthly payments, refinancing to a shorter loan term can help you pay off your mortgage sooner.
  3. Switching to a Fixed-Rate Mortgage: If you currently have an adjustable-rate mortgage (ARM) and want more stability in your monthly payments, refinancing to a fixed-rate mortgage may be a good option.
  4. Home Equity: If you have significant equity in your home, refinancing can allow you to tap into that equity. You can use these funds for home improvements, debt consolidation, or other expenses.

How to Refinance Your Loan?

If you’re interested in refinancing your mortgage, here are the steps to follow:

  1. Shop Around: It’s important to compare loan offers from multiple lenders to find the best deal. Get quotes from several lenders and compare the interest rates, loan terms, and closing costs.
  2. Apply for the Loan: Once you’ve identified the lender with the best offer, complete the application process. This typically involves submitting documentation of your income, assets, and debts, as well as undergoing a credit check.
  3. Lock in Your Rate: Once you get the approval, you can lock in your interest rate. This ensures that your rate won’t change before your loan closes.
  4. Close the Loan: During the closing process, you’ll sign the new loan documents and pay any closing costs associated with the new loan. The old mortgage will be paid off, and the new loan will take its place.

Bottom Line

Both loan modification and refinancing can help homeowners who are struggling to make their mortgage payments or looking to improve their financial situation.

Furthermore, loan modification involves renegotiating the terms of your existing mortgage to make it more affordable. Refinancing, on the other hand, involves taking out a new loan to replace your old one.

When deciding whether to pursue a loan modification or refinance, it’s important to consider your specific financial situation and goals.

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Is loan modification a good idea?

Yes, loan modification can be a good option if you are undergoing financial crisis.

What are the risks associated with loan modification?

Risks from loan modification depend on the kind of new terms you negotiate with your lender. For example; if your loan tenure gets extended, you may end up paying more interest over the life of the loan.

Can I be turned down for a loan modification?

Yes, your loan modification application can be rejected if you fail to present the evidence of your financial hardships.


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