Loan Modifications and Home Refinancing are been talked about so much they are becoming the most used financial buzzwords by homeowners nationwide. This doesnâ€™t mean people understand the differences or the financial consequences of either of them.
This article seeks to look into the pros and cons of Loan Modification and Mortgage Refinancing and to provide clear guidance to when it is best to modify your existing mortgage or to refinance it altogether.
Letâ€™s start with some basic definitions for Loan Modification and Mortgage Refinancing so we are on the same page on what we mean by these terms.
Loan modifications are used as a tool to lower the monthly payments of troubled homeowners. The whole purpose is to help people that are struggling to pay their mortgage by either lowering their interest rates, extending the term of the loan or in some cases reduce the principal balance of the loan.
You do not need to have equity on your home to apply for a loan modification, the government is actually subsidizing loan modifications through the HAMP program so that more homeowners can qualify.
Mortgage refinancing is a way for borrowers to get a better deal on their mortgage. You effectively pay off the current mortgage and negotiate a new mortgage with better conditions. This can mean lower monthly payments, lower interest rates, a shorter loan term, which reduces the cost of the loan, or a safer interest rate type (fixed, variable, ARM)
You can refinance with your existing lender or with a new lender. You do not need to be in financial difficulties to apply for a mortgage refinance. You will generally need to have some equity on your home for a lender to agree to refinance your home and be able to afford the new monthly payments which will not be necessarily be lower.
Which is the best for you?
This is a question only you can answer, because it completely depends on your personal circumstances. Here is how you work out which is the best option for you:
1) Do you have equity on your home?
Or put another way is the current value of your home lower or higher than the pending balance of your mortgage.
If you have negative equity, or owe more than the house is worth, then you are really going to struggle to refinance your home unless you are willing to pay ridiculously high interest rates, extend the term of your loan or/and increase the cost of your monthly payments. You donâ€™t have to be a finance guru to know that is not what you want. If you are in negative equity nine times out of ten you are better of getting a loan modification, which in its current form was pretty much designed to help out borrowers in your situation.
However if you are fortunate enough to have a decent equity on your home you are very likely to find a lender that is willing to refinance your mortgage with a better deal; especially if you bought your mortgage a few years ago when interest rates were higher.
2) Are you worried about your credit score?
Loan modifications affect your credit score whatever your lender has told you. Refinancing your mortgage does not affect your credit score negatively, it might even improve it. It is true the government has created a new â€œlabelâ€ for people that apply for loan modifications which in theory will not affect your credit score but the truth is that it will; if not right now it will in the near future. Banks and lenders are wary, quite understandably, of customers that ask for breaks on a loan agreement, and that is what you are doing when you ask for a loan modification.
Nevertheless if you are struggling to make it to the end of the month and have little or no equity your goal is to save your home and your credit rating is probably the least of your worries. Get a loan modification.
3) Does it reduce your interest rates?
This is the big question. Whichever road you take, Loan Modification or Mortgage Refinance you need to make sure your interest rates have dropped or you principal loan balance has been reduced, the latter is very unlikely Iâ€™m afraid. If your interest rates are not lower any savings on your monthly payments are going to cost you in the long run, look for a better alternative.
To illustrate, refinancing your mortgage could cost you anything from 0% to 3% of the balance of your mortgage but if you negotiate a lower interest rate, preferably a lower fixed interest rate, then you could recoup your costs in three to six months. If your interest rates have not dropped you are just giving your money away to the bank.Click to See the Latest Mortgage Rates»