Mortgages – What is the Difference Between a Refi and a Loan Modification?

With mortgage loans, banking problems, and lack of stimulus funds reaching their intended targets, mortgage financing has been at the top of the news chain for months. One of the most common areas of confusion with all this is if a home owner wants to reduce his monthly mortgage payment, what exactly should he be looking for?

It boils down to the fact that right now there isn’t much difference at all between a refi(nance) and a loan modification for your mortgage.

Normally, when a home owner wants to refinance his current mortgage in order to take advantage of lower interest rates, it is done with a new lender. Not many lenders are interested in knowingly reducing their profit by agreeing to write a refinancing plan for their mortgage customers. (Yes, they understand that the customer will go somewhere but that’s why most mortgages include a prepayment penalty clause.) Some modifications can be done through the people for getting the mortgage loan as per the requirements. The planning should be done to apply for the loan amount at site. The contract should be real and effective for the applicant to get the desired results without any problem. 

For homeowners who want to take advantage of some of the new modification programs available, you will most likely be dealing with your original lender because you are modifying your current terms in a unique way; something that you and the lender agree upon going forward.

In a situation where you would be seeking to refinance, you would be refinancing at the rates you qualify for by undergoing a new credit report check. You would also be required to pay any associated closing costs, obtain and pay for new home appraisal report, and may even be asked to reduce your debt by perhaps increasing your loan amount to pay off credit cards, etc.

A modification program typically doesn’t get involved in these areas. The lender only wants to know why you need help paying your mortgage. Your new “deal” will be based on factors such as whether you are already in default, and how close you are to foreclosure. The last thing the bank really wants to do is take possession of your house and go through the financial burden of holding it and reselling it. They’d rather have your money.

Home refinancing, however, is quickly becoming a lending industry dinosaur as housing prices continue to fall and owners are losing all their equity. Unless you’ve had your home for years, or you managed to put down a large down payment, chances of even qualifying for a refi are pretty slim.

Loan modifications don’t take your equity into consideration. The program was put into place simply to alleviate the stress of figuring out how to pay the mortgage each month.

There is, of course, a “catch 22”. Most home owners have been paying on time but have found it increasingly difficult. Many lenders don’t want to cut you any slack by negotiating a new repayment plan unless you’re in default. Why? Because they figure if you’ve been paying on time, why should they reduce their profit and increase their risk by lowering your payments?

So, unless you’ve already missed at least one payment, chances are you won’t even get the ear of a loan officer.