The Difference Between Refinancing and Loan Modifications

The Difference Between Refinancing and Loan Modifications

Due to the current economic situation, more and more homeowners find that they have major difficulties in giving their home loans. The most common options for mitigating part of this financial burden in such a situation are loan changes and refinancing.

These two alternatives are often confused with each other, because although they resemble certain aspects, the two are very separate ways that one can take. The decision of who to choose needs to be done carefully, while understanding the differences between the two options.

A loan change simply refers to the same loan being present, with some changes made to it. Refinancing a loan is when you get a new loan that comes at a better rate, then use this money to pay off the old loan.

To change your existing loan, you must go through your lender. Together, you determine better terms for existing loans. Most lenders need you to justify the circumstances under which you request such a loan adjustment before approving it. Examples of such situations would be a change in your job and thus your salary or a loan that you no longer can afford if the interest rate has suddenly changed or if you have delayed your payments over a considerable amount of time.

Changing your loan is advantageous and easy because it does not require you to have a high credit score to qualify for it. When refinancing a loan, this is a requirement. But to just change your loan is all you need a change or difficulty in your financial situation to be proven. There are also no additional fees involved in loan changes, such as insurance or points you need to pay for.

There is also no requirement for an assessment, nor is it a lot of paperwork as it is the case of refinancing a loan. Therefore, the cost of loan change can only be several hundred dollars and all the necessities can be executed and resolved within one to six months.

The disadvantage of modification is that the lender may be unwilling to agree if you do not show a very serious pain. Most lenders change only as a last resort if you neglected your payments for a certain amount of time. Loan changes can not be granted if the lender has sold the loan in question in any secondary market. Lenders who exercise this policy mean that many homeowners can not even qualify for loan changes.

Refinancing a loan can be a better option depending on the circumstances. When you refinance a loan, you use a new loan to pay the money for an existing loan. The biggest benefit that people see when it comes to refinancing a loan is that it takes less time than changing one. Refinancing of a loan usually takes two months or even less to be fully processed. Many people use this option because they get better terms for a loan than their existing ones that can cause them some difficulties.

Refinancing comes with more options than the change of a loan. You can refinance to lower your monthly payments. If you want, you can refinance the loan and get the opportunity to use any of your own funds to pay other bills, which can be a good way to ease the burden of times of financial difficulty. The lender for your refinancing need not be the same lender as your current loan is from. This means you have the freedom to shop for different lenders and then choose carefully after finding one that gives you the best conditions for your situation.

The disadvantages of refinancing are that you need a very high credit score for approval. This is not the case with loan modification. There is a lot of paperwork involved, as opposed to changing your loan, such as lending charges, closing costs, lending fees, home fees and taxes. These fees can be included in your mortgage so you can pay them out for small periods month by month, but of course, the total amount to be paid back will also increase. Refinancing can cost several thousand dollars and is therefore much more expensive than changing your loan.

Both refinancing and loan changes are currently undergoing a lot of changes. Previously, lenders could choose which loans they would change depending on the individual case, but now the bulk loan modification has become a priority to avoid foreclosure. It is best to approach your lender and ask them what the best step you can take when it comes to your family and your financial situation.




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