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The Difference Between a Loan Modification and Refinancing

small house next to a calculator to represent how to do a loan modification
  • Blog
  • Jill
  • No Comments
  • January 12, 2021

The Difference Between a Loan Modification and Refinancing

There are some people out there who may get a loan and are happy enough with the terms that they follow it out to the end. But others may find that, over time, the terms of their loan may no longer work as well or they would like to get a better interest rate. 

If you are interested in altering the terms of your current loan, there are two different ways to do so: loan modification and refinancing. Both are great ways to lower your monthly payments or interest rates, but let’s look at the differences between them. 

Refinancing

The most commonly used method is refinancing. Refinancing involves replacing your current loan with a redefined loan. Refinancing offers certain merits, including:

  • Lower Interest Rate: A refinance can help you lower your interest rates, depending on the new terms. If it is a mortgage, you may be able to lower your rates if the current rates are lower than they were when you got your initial loan. 
  • Alter Term Length: With a refinance, you may be able to increase or decrease your term length. An increased term means lower monthly payments, but with more interest and you will continue to make monthly payments longer. A shorter term length can mean a higher monthly payment but with less interest over the life of the loan. 
  • Alter Loan Type: If you initially took out an FHA mortgage, then you have to pay mortgage insurance on the life of that loan. But if you have more than 20% equity in your home, you can move to a different type of loan so that you will not have to pay mortgage insurance.
  • Cash-Out Refinance: With a refinance, you are also able to take money from the equity in your home. For instance, you can refinance a $150,000 mortgage into a $170,000 mortgage and the lender will give you $20,000 cash. This increases the amount of your loan but you can use that cash to cover other high-interest debts like credit cards. 

The largest difficulty with a refinance is that it requires a good credit score and income proof because you’re essentially applying for a new mortgage. In addition, you will also have to pay closing costs again. 

Loan Modification

With a loan modification, you are not replacing the loan. Rather, you are altering the terms of your current loan. There are certain benefits to loan modification, and some are similar to the benefits of refinancing. 

  • Lower Interest Rates: Just like with refinancing, with loan modification you can lower your interest rates. This works if current interest rates are lower than they were when you first got your loan. 
  • Structure Change: You may be able to use loan modification to change from a variable interest rate to a fixed rate. This can help you better predict your monthly payment if your income is now lower. 
  • Term Changes: If you are unable to keep up with your payments under your current loan, then a loan modification can help change the terms. Your lender can change your loan to a longer term to reduce your monthly payment. 
  • Reduce Your Principal: In some circumstances, you may be able to get a principal reduction, but this is rare. This typically only arises if there is absolutely no other way for you to keep up with your loan or avoid foreclosure. This will require you to agree to a repayment plan to show your lender that you will be able to keep up with the new agreement. 

 Bartifay Law Offices can help you determine which is the best option for you. To schedule a free consultation with a Bartifay attorney, call (412) 824-4011, or visit them online.

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