A homebuyer may agree to the terms of a mortgage at the time of purchase, but life circumstances change in 30-year loan period. Many homeowners might be in the position of paying too much for their homes due to high interest rates or booming seller’s markets, causing them to miss mortgage payments or even face foreclosure.
The good news is that homeowners may be able to lower their mortgage payments through loan refinancing or mortgage modification, but they must consider each one carefully in order to select the best option.
What Is Mortgage Modification?
If you cannot make your monthly payments or you owe more on the home than it is worth, you may qualify for loan modification. This option allows you to keep your existing mortgage with the same lender, but adjust the terms of the loan.
Available modifications include lower interest rates, length of the loan period, lower monthly payments, and even a reduction on the principal if home values dropped since the loan was issued.
There are both benefits and disadvantages to modification, including:
- Options for owners in arrears. Owners can still qualify for loan modification if they're behind on payments, but may not eligible for refinancing.
- Less paperwork. If a lower rate or payment is the sole reason for changing lenders, the bank may be willing to make the change to keep the client’s business.
- Flat fees. Lenders often offer mortgage modifications to preventing clients from taking high-value loans elsewhere, but they may charge a one-time fee for doing so.
What Is Refinancing?
Home loan refinancing is the process of securing a new loan to pay for the home. Essentially, the new loan pays off the existing one, and owners make payments to the new lender. Refinancing can offer owners many benefits depending on their goals, such as paying a lower interest rate, lower monthly payments, shortening or extending the life of the loan, or even getting money back using home equity as collateral.
A few pros and cons of home loan refinancing include:
- Changing lenders. You're free to choose any lender you wish for refinancing, allowing you to shop around for the best rates and loan terms.
- Changing loan type. You may qualify for a different type of loan that wasn't available to you at the time of initial purchase.
- Adding or removing an owner. Refinancing is one way for owners to add or remove a person from the current mortgage, such as after marriage or divorce.
- Money back. Refinancing offers a way for owners to take equity out of their house in the form of a cash payment to pay off other debts, make improvements to the home, or make a large purchase.
- Good credit. Refinancing involves applying for a brand-new loan, so owners must have good credit, be current on mortgage payments, and have a minimum amount of equity in the home.
- Closing costs. Much like the original loan, refinancing requires the payment of closing costs that range from one to several thousand dollars.
How Can I Choose a Loan Option Right for Me?
As it is easier to modify a loan than replace it, it is best to begin by asking your current lender about modification options.
Your lender should offer terms of modification, as well as whether the financial institution has any refinancing programs, such as the federal Home Affordable Refinance Program, that could be available to you.
If you qualify for refinancing, you can also take your current lender’s offer to another bank and see if it can beat it.
Let Us Help
Once you have all your options, you'll need to perform careful calculations to see which one is the least costly and offer the most benefits. Our real estate attorneys have years of experience representing buyers and sellers, and can examine all of the offers available to determine which is best for your financial goals.
Simply fill out the quick contact form on this page to set up a consultation to get answers your questions.