Loan Modification Vs Refinance – Why Should You Care?

Nov 11, 2023 By Susan Kelly

When you are out buying your first home, more often than not, people go for a mortgage loan to ease their purchase. Getting a loan for your mortgage seems viable as the home costs and real estate prices are increasing rapidly. But after a few months, people start struggling to meet their monthly deadlines.

When that happens, you need to reconsider and either get refinancing or a better option that can lower your monthly payments. To help you understand that, in this article, we discuss loan modification vs refinance and how loan modification is the better option for you.

What is Loan Modification?

As the term states, this process allows you to make changes to your mortgage when there is a certain difficulty in paying back the monthly rates. The difficulty can be due to a few reasons, such as:

  • You are financially unable to meet the deadlines because you are running short of some amount.
  • Due to the financial instability, there is a real danger that you might default.
  • You cannot refinance due to your lower credit score or other reasons.

If your loan modification is thus approved even after these difficulties, you can do the following modification when it comes to loan modification vs refinance:

  • Reduce the monthly payment by increasing the total payback duration where the total capital remains the same.
  • Reduce the interest rates while keeping the capital debt the same.
  • Instead of reducing monthly payments and interest rates, you can get a good reduction in the principal amount that you need to close.

What is the Appropriate Time to Go For Loan Modification?

In the debate of mortgage modification vs refinance, it is pretty evident that when you are unable to pay, you should look for better options. So either you try to get refinancing for your mortgage, or you simply go for loan modifications. The most typical scenarios when loan modification vs refinance is a good debate are:

  • If your spouse has died and an income source is gone.
  • You have taken a divorce and are under stress due to legal fees.
  • You have lost your job.
  • If you or your family member has a disability.
  • If you lose a lot of equity due to a recent natural disaster.
  • Your insurance doesn’t cover a property loss in some instances.

Here, you need to understand that no matter the loaning company or bank you are deciding to go for loan modification, there are certain conditions. Each bank or lending authority will have its criteria and eligibility requirements when reviewing your case. Some of them only allow for loan modification if you have been unable to pay the mortgage a few times.

How to Successfully Apply For Loan Modification

While you can try to keep your credit score at an acceptable level and look for other ways to help you finance, ultimately, it will all land with the lender if they approve or not. So when you are going to apply for loan modification vs refinance, be prepared for the following things:

Financial Difficulty Explanation

As a borrower, you should be able to articulate why it is challenging to meet your mortgage deadlines. If you have recently had a divorce or lost a job and are unemployed at the moment, you should have the paperwork ready. Even in the case of a natural disaster, you should prepare proper documentation. So, go over the list we discussed above if you fall under one of those conditions.

Income Proof

You should be able to provide proof of your income, whether you are an employee or a businessman. The proof should be accompanied by your tax returns and application as well.

Asset List

Prepare the documentation for your assets, such as your salary or other bank accounts, real estate investments, etc. In some cases, the banks or lenders also ask you to provide an authenticated list of equity to assess your situation.

Payment at New Loan Modification vs Refinance Levels

Some banks and lenders are meticulous about assessing their customers when it comes to mortgage modification vs refinance. So, they can ask you to pay a few installments on the new level before they complete your application for loan modification. This is to assess if you will be able to continue paying them based on your financial situation.

The Difference Between Loan Modification vs Refinance

A refinance is typically the term and procedure that we use for individuals who want to acquire a new loan to enhance their chances of completing previous loans. Based on different categories, this new loan allows them to pay some fallback and gain cash in the process as well.

In loan modification vs refinance, modification is just re-iterating the terms. It has different conditions that you need to fulfill to get it approved, while refinancing is a bit easier in this case.

What is the Appropriate Time to Refinance Instead of Modification

Now that you understand why and when you should go for modification. You should also understand in the discussion of loan modification vs refinance that when to go for modification.

There are higher increases in interest rates when it comes to refinancing. Hence, it is the most logical decision to find the next best option. Though loan modification is still the next best thing, you should go for refinancing when:

  • You are considering switching from your previous lender to a new one.
  • You want to either minimize PMI or MIP payments or ultimately want to eliminate them.
  • A home’s equity is a good metric for better deals. Therefore, and understandably so, individuals want to tap that equity for better deals.
  • The borrower wants to change the terms and conditions of mortgage financing.

So, for example, in your mortgage terms, you still have 20 years or so left. So, if you convert it to a 30-year mortgage again, the remaining amount is distributed. Instead of 20, you now have to pay in 30 years.

Final Comments

This article provides you with two options and explains which loan modification vs refinance is better.

Related articles
Why 20 Year Mortgage Rates Today is The Best Time to Invest!
You may have to pay higher monthly payments due to 20 year mortgage rates today, but it is the best time to invest as the rates may increase.

Nov 11, 2023 Triston Martin

What is Hard Inquiry And How It Affects Credit Report
You request hard inquiry when you apply for credit or personal loan to any creditor, lender, financial institute, or bank. Because it helps to access your financial credibility. A hard inquiry can affect your credit file and score poorly in some conditions. Details are given in the article.

Jul 13, 2022 Susan Kelly

A Guide to Reclaim Unclaimed Property
Every year, billions of dollars’ worth of unclaimed property is returned to the various states. The most prevalent sort of unclaimed property is bank account balances that have been dormant for more than a year. Read on to find out if you have any escheatment and how to get your hands on it.

Jul 13, 2022 Susan Kelly

Medicare Disability Simplified: Everything You Need to Know
Explore the comprehensive guide on Medicare disability - its eligibility conditions, types of plans, costs, and the enrollment process. Get the most out of federal healthcare!

Jan 27, 2024 Triston Martin

Maximizing Benefits: 7 Essential Facts about the American Eagle Credit Card
Explore the numerous benefits of the American Eagle Credit Card, learn how to apply, and discover how to maximize your rewards with every purchase.

Jan 27, 2024 Triston Martin

Playing it Safe: How to Avoid the Top 5 Life Insurance Fraud Schemes
This article offers an in-depth look into common life insurance fraud schemes, providing the necessary knowledge and tips to help individuals safeguard themselves from falling prey to such scams.

Jan 26, 2024 Susan Kelly