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Loan Modification and Refinancing: What’s the Difference?

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  • Blog
  • Jill
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  • February 22, 2019

Loan Modification and Refinancing: What’s the Difference?

When dealing with loan modifications and refinancing, there are many benefits to whichever route you choose or are eligible for. Reduced interest rates are a general benefit to both of these options. Getting a loan modification alters the initial terms of mortgage due to financial difficulty. The goal of a modification is to reduce monthly payment. Which is decreased by the lender, who will determine a new monthly payment based on clauses made to your initial mortgage contract. Luckily, there are many different loan modification options. They are designed to benefit homeowners who find themselves in the most difficult positions.

Principal Reduction


The first loan modification is Principal Reduction. Principal reduction partially eliminates your current debt. Allowing you to pay less than what you initially borrowed and your new payments are recalculated based on a smaller balance. Lenders are generally averse to decrease principal loan. And are more fervent on modifying other aspects to profit them. That being the case, deliberate your revised contract with a tax consultant to ensure no taxes are due on the forgiven debt. This makes this option the most challenging option to be eligible for.


Lowering Interest Rates


Lowering Interest Rates is another great option, too. When your lender reduces your interest rates, that will allow you to pay less per month on your current payments. Although be wary these reductions may be transitory. It is best advised to review the particularities of the new agreement to anticipate a future increase.


Extended Terms


Extended Terms also propose new light in financial freedoms when deciphering loan payment plans. Extending the terms of your agreement will allow you the ability to lessen your current monthly payments. Although you will be paying for a longer period of time. This option may seem beneficial. However, often enough it results in greater interest charges. Since you will be paying the interest for more time.


Fixed Rate


Transferring to a Fixed Rate Loan is a great option for those of whom are unable to keep up with fluctuating loan rates. A fixed rate loan is a wonderful option because it allows you to always know what your payments are going to be every month. This option allows you the opportunity to pay the same interest rates until the end of your loan.




Lastly, there is another option- to postpone your payments. Being able to legally miss a couple of loan payments is extremely beneficial. Sometimes, you may find yourself in a bind and are unable to pay by your due date because your paycheck comes in just a few days shy. This is most commonly known as a “forbearance agreement.” This route will give you the opportunity to make up those payments at later dates. They don’t absolve from your total loan amount, though. Your lender simply attaches them to the back end of your loan. This will result in having to pay a few more months than anticipated due to moving payments around.




When you refinance your loan, you’re not just altering the terms of your contract. Instead, you are replacing the existing contract entirely, thereby receiving a new, lower-rate loan, which may also have amendments that work more in your favor. One clause most homeowners appreciate about the refinanced contract is its ability to allow the owner to pay a fixed rate loan, rather than a fluctuating loan. Recall, loan modifications may only be temporary in many cases, whereas refinancing is more of a lasting resolution.


With loan refinancing, there is a much smoother process. Most of the time, it can be achieved in 30-45 days, whereas loan modifications are more cumbersome and time-consuming due to the sheer volume of loan modification applications submitted regularly. In this case, it is crucial to keep up with your payments if a loan refinancing is a route you prefer.


At Bartifay Law Offices, we have helped numerous clients with their loan modifications and refinancing. Need more information on which option is best for your case? Give us a call today and schedule an appointment to meet with our experienced financial attorneys.

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