Many homeowners are familiar with refinancing their mortgage, but did you know that many lenders offer loan modifications?
If you're looking to change the terms of your mortgage, here's everything you need to know about refinancing and loan modification so that you can choose which option best complements your needs.
What Does it Mean to Refinance?
Refinancing your mortgage is the process in which you replace your current mortgage with a new one, either from the same lender or another.
It's a popular option when it comes to securing new terms for your mortgage, and the process is similar to what you would experience when purchasing a home. The lender requires various financial documentation, and there are closing costs to consider.
Reasons Homeowners Refinance
There are a few reasons why a homeowner would want to refinance their mortgage.
The first, is to change the term. If you're looking to secure a lower monthly payment, you can opt to lengthen your mortgage term. Keep in mind that while you'll save money upfront, you may end up paying more over the life of the loan, thanks to interest.
If you're looking to own your home sooner and can handle an increase in monthly installments, you can refinance to a shorter term. While you'll owe more each month, you'll also pay less in interest, which is a perk for many.
Another big reason homeowners choose to refinance? To secure a lower interest rate. Rates can change and often do. Refinancing helps you lock in a lower rate. Many times the money saved is worth the costs associated with refinancing.
A cash-out refinance is another popular option, especially for those who have built up equity, are looking to pay off larger debts, or who would like to tackle a home improvement project. Why? Because mortgage interest rates are typically lower than what a consumer would find on credit cards or other types of loans.
Another perk of refinancing? You can change the type of mortgage you have. This is a popular option for those whose needs have significantly changed over the years. What worked for you a few years ago may not be the best option for you now.
When Should You Refinance?
- Have equity
- Are in need of money for other bills
- See interest rates are significantly lower than what you're paying
- Want to increase or decrease your monthly installments
Refinancing may be the right move for you. As luck would have it, interest rates are currently at historic lows, so if you're curious about refinancing, see what rates you qualify for!
What Is It?
As you can see, refinancing has many benefits. So what is loan modification, and why would a homeowner choose that route instead?
A loan modification modifies your current mortgage; it doesn't replace it with a new one. Because of that, you must go through your current mortgage lender.
What Can You Do With Loan Modification?
Many homeowners choose to modify their loan to secure a new loan term. This is especially helpful for those who increasingly find it difficult to make their monthly installments on time. Rather than see you fall behind on payments, a lender may decide to work with you to extend your loan terms, which would reduce your monthly payment.
It's also possible to get an interest rate reduction if rates have fallen since you first signed your mortgage paperwork. This route allows you to lower your monthly payment without having to change the term.
In rare cases, a homeowner may be able to secure a principal reduction through loan modification. This is typically reserved for homeowners who are dangerously close to foreclosure, once all other possibilities have been exhausted. It isn't impossible to get a principal reduction, however, as lenders don't want you to go into foreclosure any more than you do! There are, of course, certain eligibility requirements which are designed to ensure you can stay on top of your new payments.
Loan modification also allows for structural changes. For example, you could go from an adjustable-rate mortgage to a fixed one, which is great for those looking for predictable installments.
When Should You Modify Your Loan?
So when should a homeowner modify their loan instead of refinancing? Typically, loan modification is for those who are having difficulties with their current mortgage. That means that if you:
- Need a principal reduction
- Have fallen behind on installments
- Owe more money than what your home is worth
Loan modification may be your best option.
Things to Consider
It's more difficult to modify your loan than it is to refinance, and lenders are under no obligation to grant you a modification.
That being said, no lender wants to deal with foreclosure. Be honest about your current situation. Your lender is more willing to work with you than you may think!
Protect Your Financial Health
Both refinancing and loan modification can help protect your financial health. Don't wait until you fall significantly behind on payments before reaching out to your lender, and when it comes to refinancing to secure low interest rates, act fast!
If you are interested in refinancing, Lendgo makes it easy to connect with lenders, all in a no-obligation, hassle-free process. By acting now, you can also avoid the fast-approaching adverse market refinance fee, so don't hesitate to explore your refinancing options now!