Differences Between Loan Modification and Refinancing

When a household is experiencing some financial trouble, or when certain circumstances change dramatically, the existing mortgage that is held on a home might become impractical to maintain. In these cases, two of the most popular options that can help are known as loan modification and refinancing. Both options can help to reduce the monthly payments that are due, but each comes with its own set of rules. Not everyone will benefit from refinancing, and loan modifications might not be the solution that some households are looking for.

Refinancing a mortgage is a process that is done through a mortgage provider, although it does not necessarily have to be the institution that provided the current mortgage to the borrower. When a mortgage is refinanced, an entirely new mortgage loan is drawn up and signed. This completely nullifies the previous mortgage, so there is no liability to the old terms. The advantage with refinancing is that the new loan can be adjusted for several different factors that are present in the current market such as lower interest rates. A mortgage can also be refinanced through a completely different lender, making it possible to shop around for the best rates and offers.

Unfortunately, refinancing has several limitations and restrictions that can be disqualifying, especially for households that are in financial trouble. Since the refinancing involves acquiring an entirely new loan, the borrower must qualify for this new loan with their current assets. There can also be upfront fees or closing costs associated with the new loan. The home that is in question must be re-assessed to determine its current market value, and if a home has depreciated then it might make refinancing impossible. A variety of other factors such as personal income, other loans or mortgages, and problems on a credit report like late payments can all exclude refinancing as an option.

Unlike refinancing, loan modification is a solution that works with the existing mortgage that is attached to a home. Modifications can only be made by the institution that issued the original loan, and in some cases they are tightly regulated by state laws. For the most part, a loan is modified for only a short or defined period of time during which a lower interest rate can be paid. After this time has ended, the original terms of the mortgage are reinstated. In a few areas, there are regulations that explicitly state that any modifications that are made are applicable for the entire life of the loan. Since there is no need to have a home reassessed or to hold the borrower to any higher standards than those they have already been met, modification is often an answer for homeowners who do not have the resources to refinance.

Modifying a loan is usually done with the help of a skilled loan modification attorney. These individuals are aware of the laws and regulations associated with the modification process and can help to guide a borrower through the procedure so they receive the most favorable terms available. It can also be important to work through a loan modification attorney because the overall process can take several months and require multiple meetings and filings to complete. During this period, an attorney can help the borrower to meet filing deadlines and to avoid missing procedural steps that could threaten the acceptance of the loan modification.