Learn the differences between loan modification and refinancing in this informative article. Understand the pros and cons of each option to decide which option is right for you.
Loan Modification vs. Refinance: Understanding the Differences
When trying to lower monthly payments on a home loan, homeowners have the option of signing up for a loan modification or a refinance. There are a few differences between the two options that can make one more ideal for a particular situation than the other. It is important to be informed about how each option works in order to make an informed decision.
Loan Modification: An Overview
A loan modification is a change made to an existing loan to make it more affordable for the borrower. The modification process often involves negotiating with the lender to alter the terms of the loan such as the interest rate, repayment period, or principal balance. Most lenders will only agree to a modification if they think it will reduce the risk of the loan going into default.
Refinance: An Overview
A loan refinance is the process of replacing an existing loan with a new one. Refinancing allows a borrower to potentially lower their interest rate, change the terms of the loan, or even take out cash. This means that the homeowner is essentially taking out a brand-new loan to pay off the old loan.
Differences Between Loan Modification and Refinancing
The main difference between loan modification and refinancing is the amount of paperwork and processing time involved. Refinancing typically requires more paperwork and can take longer to approve, while loan modification requires less paperwork and is usually a quicker process. When it comes to loan expenses, loan modifications and refinancing can often have similar fees and closing costs. These costs include the appraisal fee, loan origination fee, application fee, and credit report fee.
Which to Choose?
Homeowners should evaluate both options and decide which is best for their individual needs. In some cases, a loan modification may be the best choice due to its shorter processing time. In other cases, refinancing may offer more flexibility with terms, interest rate, and fees. The best course of action is to compare both options to determine which one will provide the most long-term benefits and savings. It is important to remember that either option can have a significant effect on a homeowner's financial situation- so it is important to make an informed decision based on the specifics of your own individual situation.
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