Refinance vs. Loan Modification: What is the Difference?
December 23rd, 2021
December 23rd, 2021
Do you want to make changes to your mortgage, like lowering your interest rate or extending your loan term? If so, you may be wondering whether it is appropriate to get a refinance or request a loan modification. Let’s explain the differences between these two solutions so you know which one is suitable for your situation.
A refinance is a complete replacement of the home loan you have now with a new one that better fits your needs.
A loan modification is exactly what the name describes—a change to the loan you have now, but not a full replacement of that mortgage with another.
By refinancing your mortgage, you may be able to:
What Can You Do With a Loan Modification?
With a loan modification, it may be possible to:
For most homeowners, a refinance is the right choice. Loan modifications are aimed specifically at homeowners with a certain set of hardships who are underwater.
If you are underwater, then you probably are going to need to apply for a loan modification. That said, refinancing might be an option—you will need to look into it.
To qualify for a loan modification, you will have to provide a hardship letter and offer a paper trail to prove your statement. Examples of hardships that might be acceptable include natural disaster, chronic sickness, a death in the family, or divorce.
Let’s say you are currently on your mortgage payments and financially stable. You just want to see if there is a way you can pay a lower interest rate and drop your mortgage insurance requirement since your credit score has increased along with your home equity.
This might be a situation where you could refinance successfully. With sufficient equity, you could change to a different type of home loan with no mortgage insurance. Since your borrower profile is now more competitive, you also might qualify for a lower interest rate.
Imagine that you are in a scenario where you are underwater and are worried about going into foreclosure. Your spouse recently died, and there is no way you can make up for their lost income. This could be a situation where you might be able to qualify for a loan modification after documenting your hardship.
Now you know the differences between loan modifications and refinances, what you can accomplish with each, and when each one is suitable. While they might sound similar on the surface, you can see they are aimed at homeowners with very different situations.
But if you are still not sure whether you should be looking into refinancing or modifying your loan, we can help. To ask us your questions, please give us a call today at (317) 255-0062. Let’s get your mortgage working for you!
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