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Loan Modification vs. Refinancing: What’s a Better Option?

Refinancing vs. Modification

Perhaps you’re having trouble keeping up with your bills. Or perhaps you’re way behind on your mortgage payments. One thing is certain: You want to change the terms of your current home loan, and you need help. Should you modify your mortgage, or should you simply refinance it? While both options, in theory, should save you money, each has its own advantages and disadvantages, and each has its own criteria for qualification. To help you understand which one would make more sense in your case, Caal has put together the following summary chart:

 

Loan Refinancing Loan Modification
What does it mean? You pay off your original mortgage entirely and replace it with a new one that has better interest rates or terms Your lender adjusts the terms of your existing mortgage, usually using a “Step Up Program” for the interest rate, i.e. 3% the first 5 years, 4% for the 6th year, and 5% for the remaining years of the newly agreed terms (be it 30 years or 40 years).
Am I obligated to stay with my current lender? No. You can shop around for other lenders and work with the one who can give you the best rates or terms. Yes. Your current lender is the one modifying your loan, so you’re obligated to work with your current lender.
How do I qualify? You may have an easier time to qualify if: 

- You have an excellent credit score (usually in the mid-700s)

- You have earned some equity on your home so that your loan-to-value ratio (mortgage amount divided by appraised value of property) is lower than 80%

- Your monthly mortgage payment is not more than 38% of your monthly gross income before refinancing

You may have an easier time to qualify if: 

- You have experienced financial hardship

- You have missed at least one monthly mortgage payment (we are not recommending that you miss any of your mortgage payments)

- You’re at risk of defaulting or foreclosure

- Your monthly mortgage payment is higher than 31% of your monthly gross income before the loan modification

- You have a loan-to-value ratio (mortgage loan amount divided by appraised value of property) that’s higher than 100%

What are the costs? You’ll likely be charged for “points” (a fee to lower or “buy down” your original interest rate) and other closing costs (escrow, title insurance, etc.) that you can either pay upfront or add to your new mortgage. You won’t be charged for points or closing costs. The process is so complicated, however, that borrowers often pay thousands of dollars for professional help with their application.
Is an appraisal required? Yes 

No
Escrow and title required? Yes No
How long does the process usually take? About 30 to 60 days About 60 to 180 days, sometimes even longer
Why would my current bank or lender agree to this? Because you’ll be paying off what you owe them (your original mortgage) in full Because they’ll want to avoid additional late payments, late fees, or the risk of foreclosing (all of which equal more money lost)

 

Usually, refinancing is more popular during a stable or prospering market. Meanwhile, loan modification requests have increased during tough economic times, and when property values drop significantly, as what happened in recent years. In fact, according to Moody’s Economy.com, 30 percent of mortgaged homes in the U.S. are now “underwater” or are worth less than the debt outstanding on their homes.

 

So what should you do—modify your loan, or refinance it? That would really depend on your current situation, and the best way to prepare is by continuing to educate yourself and by exploring your options. For instance, even if you qualify for refinancing, note that it’s not always a good idea to do so. You would also need to consider other factors, such as your “breakeven point” (the point in which you recoup all your costs and start keeping all your “savings”). Here’s a good article on things to know before you refinance. You can also read the following mortgage refinancing tutorial. Or, if you feel that loan modification is a more realistic option for you, you can check out <span

style="color: #000000;">Caal’s loan modification online software, to see whether or not you pre-qualify, along with other tips and resources.

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