The Difference Between Home Loan Modification and Mortgage Refinancing

Amy Nutt


During these difficult economic times, more people are losing their jobs and having a tough time making their mortgage payments. This has resulted in millions of foreclosures and millions of people on the verge of losing their homes. Fortunately, there are opportunities out there that can help homeowners stay in their homes. Two options are Home Loan Modification and Mortgage Refinancing. When considering these two options, it is important to understand their differences.

Home Loan Modification

Home Loan Modification is when a lender and mortgage holder change the terms of a mortgage by changing the amount of the monthly mortgage payments. The goal is to make payments more affordable for the homeowner. If a lender is owed money, they will often prefer modifying a loan instead of advancing with a foreclosure as there are many fees associated with the process. Giving a mortgage holder the chance to bring the mortgage up to date and provide better terms is much easier and less expensive. Other benefits of a loan modification include: it does not depend on a person's credit score, it usually results in a lower interest rate, and it allows lenders to get rid of a bad asset and sell the new loan on the open market. For many homeowners, refinancing is not an alternative. For homeowners who cannot make monthly payments or have recently lost their job, a loan modification may be a good solution. A homeowner will have to provide proof to show that their current loan has put them in substantial financial difficulty.

Mortgage Refinancing

Mortgage Refinancing means the terms of an existing mortgage are withdrawn and a new mortgage is put in place that offers better rates and terms and conditions. You are actually paying off your existing mortgage with a new mortgage. The conditions and terms are negotiated by the lender and homeowner and they both agree to the new terms. The result is usually better terms and payments. The major difference from loan modification is that mortgage refinancing will involve fees and penalties, and home loan modification does not have these fees. Mortgage refinancing involves paying such fees as title fees, escrow fees, lender fees, appraiser fees, and taxes. Most home owners refinance in order to lower their interest rate, to extend the life of their loan, or to pay off other debt. Lenders normally require that homeowners who are looking to refinance have a good credit score, equity in their home, and proof of job security.

Deciding which option is best often depends on the homeowner's personal situation. There are advantages and disadvantages with each type of home loan. If you have built up a lot of equity in your home, you should consider refinancing. If you have a poor credit rating, you may want to consider a loan modification. With the increase of mortgage defaults, homeowners should know there are options out there to save their home from foreclosure. It is just a matter of researching and choosing the best option that meets their particular needs.

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