Some homeowners want to change their mortgage payments after the contract has been signed. It happens often. A financial situation has changed, or they realize they want to use more of their equity or pay the loan off faster. Hence, lenders have two paths a homeowner can take to change their mortgage contract; loan modification and refinancing.

What Is Loan Modification?

A loan modification is an agreed-upon change made to the terms and conditions of the existing home loan.  This is often used to make payments more affordable. It may involve things like reducing the interest rate, changing the loan type, or extending the life of the loan. Loan Modifications help struggling homeowners prevent foreclosure.

Benefits of Loan Modification

The main advantage is that the modification will lower monthly payments. However, there are several ways it can do this. A modification can extend the loan term, which will mean lower payments over more time. It can lower interest, which will make the loan more affordable. A modification can pause or reduce mortgage payments. It can also reduce the principle, although that is rare.

Qualifying for Loan Modification

There are no definite rules when it comes to loan modification. However, there are three criteria that are almost always required. The first of these is financial hardship; you should demonstrate your current financial hardship. Occupancy; you must live in the house you get the modification for. Income; proof of income to show why you cannot make the mortgage payment.

Is Doing a Loan Modification a Prudent Idea?

Suppose you are in a situation where mortgage payments have become a major source of financial stress due to an unforeseen change, such as job loss or medical bills. In that case, it is a good idea to discuss modifying the loan terms and conditions with the creditor.

What Is Mortgage Refinancing?

Mortgage refinancing refers to replacing the existing mortgage with one better suited to your needs. The new mortgage has different terms and conditions, such as changing mortgage types, the terms, or the interest rate. Refinancing is done to either lower the monthly payment, borrow against equity, or shorten the mortgage.

Benefits of Mortgage Refinancing 

There are several benefits to mortgage refinancing, depending on your financial situation. To put less income toward the mortgage, a refinance can lower the interest rate or extend the life of the loan. 

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Refinancing can open the door to faster equity acquisition by shortening the loan term. Use refinancing to consolidate debt by using equity to pay off other high-interest debts, like student loans or credit card balances. A refinance to lower interest rates and consolidate debt can also raise a credit score.

Qualifying for Mortgage Refinancing 

Qualifying for a refinance is trickier then a loan modification. Common requirements include a stable income, high equity in the property, and a good credit score.  Lenders often require a professional appraisement to ensure the property has stayed intact. 

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It is also important to have cash for closing costs. Lenders also want to see a good debt-to-income ratio (DTI) when refinancing. Every lender is different, so ask your creditor what is required.

Calculating the Cost of Mortgage Refinancing

Although it can be advantageous in the long run, refinancing has a high upfront cost. Expect to pay 2-5% of the total mortgage in closing costs. Depending on the lender, you may also be required to pay for the appraisal, which can range from $500 - $2000. Ensure you save more money than you spend on refinancing.

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Interest Rates

Interest rates impact the appeal of a refinance. It is a better option when they are lower than the original because you will pay less interest. When interest rates rise, refinance if the net gain is worth the cost of raising interest rates. This applies to all loans. However, adjustable-rate mortgages (ARMS) will move with the market.

Mortgage Insurance

Mortgage insurance protects the lender if a borrower defaults on their home loan. It is required with a downpayment of less than 20%. In most cases, the customer pays the insurance premium on top of their payments. 

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Mortgage insurance helps both parties because it lowers the risk for the lender and allows the borrower to buy a house even without a size-able down payment.

Loan Terms

A loan term is the time it will take to repay the loan, also referred to as the life of the loan. This is an important factor when looking at refinancing. Depending on how long you plan to live at the property, you may want to extend or decrease the loan term when you refinance.

Loan Servicing

Loan servicing is the process by which a company collects payments from borrowers, manages the record-keeping, and provides customer service for mortgage loans. The loan servicer acts as a middleman between the borrower and the lender. 

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It is responsible for handling the day-to-day tasks associated with maintaining a loan, such as collecting payments, handling escrow accounts, and responding to borrower inquiries.

Conclusion

Mortgage modifications and refinances are helpful when financial situations change. They are beneficial to both the lender and the borrower and can alleviate financial stress. Modification is geared toward those approaching foreclosure, while refinancing is more often for folks for whom a change to the contract would be beneficial.

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Consult with a Wesley Mortgage specialist to learn more about what loan options are available.