As the current economic crisis continues, many homeowners are struggling with the decision of whether to modify their existing home loan or refinance their property. Both are options that can reduce your monthly payment and help you save money; however, there are great differences between them. A loan modification will change the terms of your existing mortgage. Often payments are reduced, or the loan term is extended offering temporary relief to the homeowner. With a refinance, you are creating in essence a new mortgage. In order to determine which one suits you, several factors need to be examined.
When refinancing, most lenders will require a new appraisal to determine the current value of your home. When applying for a mortgage modification the requirement of a new appraisal is up to the lender's discretion. Lately, most of the major lenders are requiring one. When refinancing there is often closing costs which you will pay or if you have enough equity, have the option of adding them to your new loan amount. Most lenders will also require a new title insurance policy for their protection if you are refinancing.
While your credit score is one of the determining approval factors when refinancing, it is not taken into consideration when a loan is being modified. Interest rates also vary between the two programs. Since the primary purpose of a modification is to reduce the monthly payment, interest rates are very low. Refinances are based on current bank rates.
Time frames for completion also vary. A typical refinance can be completed with 30 to 45 days. In contrast, modifications can take up to 180 days. Since lenders are so overwhelmed with modification applications, the time for completion can take even longer.
Another important factor to consider is the equity in your home. If your home's value has plummeted, the lender is likely to modify since foreclosing may cause them bigger losses. With a refinance, if there is a lot of equity, the lender can offer an attractive package to the homeowner.
These factors are very important and should be discussed with a mortgage professional or real estate attorney before you make a decision as to which course of action you take.
