What Is the Difference Between a Loan Modification and Refinancing?
If you are struggling to make your monthly mortgage payments, there are options available to you. While many people are familiar with the concept of refinancing their home, some are not aware that they might also be able to modify the terms of their home loan with their lender.
It is important to understand the differences between the two options and to consult with an experienced foreclosure defense attorney to select the one that is right for you.
What Is a Loan Modification?
If your mortgage payments are behind due to financial hardship and the mortgage payment is more than 31% of your monthly gross income, a homeowner may be eligible for a loan modification on their home.
A loan modification is an agreement that involves changing the terms of your loan on a permanent basis to lower the payment. During a loan modification, the interest rate is lowered, and the term of the loan can be repaid over a more extended period. In some cases, the principal can be reduced so that the home is not underwater, and payments are more affordable.
A loan modification may be the best option if you can no longer afford your monthly payment. Requesting a loan modification is sometimes the best option if you wish to keep your home, you do not want the bank to foreclose on your property, or you do not want to file bankruptcy.
To be eligible for a loan modification, you must be unable to make a mortgage payment due to economic hardship. You must complete a trial period to demonstrate that you can afford the new payment. You must also provide the required documentation (proof of income, tax returns) to the lender for approval.
The benefits of loan modification in comparison to refinancing is that it helps you get current on payments, the modification alters the existing loan terms, and the process does not incur any closing costs or additional fees. Loan modification is recommended for homeowners who currently have a significant financial hardship, already be late on their payments and are unable to qualify to refinance.
How Can I Refinance a Home Loan?
While a loan restructuring changes the terms of the original mortgage, a refinancing loan pays off the original mortgage loan by replacing your current loan with a new one.
Refinancing involves getting a loan with a different interest rate and term length. This may be a good option for borrowers who took out a loan when interest rates were higher, and now the rates have dropped. Refinancing allows the homeowner to lock in current, low interest rates and lower their mortgage payment, or make the same payment over a shorter amount of time.
Refinancing is generally only available to those who are current on their mortgages and have good credit. Refinancing is also not generally available unless the owner already has equity in the home. One drawback is that it has closing costs associated with a new loan. When looking to refinance, it is best to shop around for the bank that will give you the best terms and save you money.
Can You Refinance If You Have a Loan Modification?
Although loan modification allows you to change the terms of your existing loan, there are also refinancing programs that can facilitate the modification of your mortgage as well.
One option is the Home Affordable Refinance Program (HARP). This program facilitates refinancing for homeowners, even if borrowers are underwater or have little equity in their home. Through HARP, you could take out a new loan to repay your existing mortgage.
HARP is an option for homeowners whose mortgages are owned or guaranteed by Fannie Mae or Freddie Mac. Your loan must have originated on or before May 31, 2009. You must have a loan-to-value of more than 80% and be up to date on all mortgage payments.
If you are not eligible for HARP, want to refinance and had a previous loan modification, then these rules will generally apply:
- You have made at least 24 mortgage payments since the restructuring occurred. If a second mortgage exists that was restructured, the same period applies whether the mortgage is on a first home, a second home or an investment property.
- If you are purchasing or refinancing another property that is separate from the property that has a restructured loan, a one-year waiting time is required to refinance.
- If your previous loan modification contained a forbearance, the additional interest was tacked onto the principal balance of the mortgage at the time the restructuring was completed, or if there was forgiveness of the principal balance, it would be up to the lender to approve a loan for refinancing.
Additionally, lenders are required to report any modified or restructured mortgages on credit reports. Even if you didn’t have any missed mortgage payments, a restructured mortgage could be a red flag to potential mortgage lenders.
Contact a Loan Modification Attorney Today
If you are behind on your mortgage payments or are in danger of losing your home, New York foreclosure defense attorney Michael H. Schwartz can help. Our law firm has not lost a single home to foreclosure for any of our clients, and we have effectively assisted clients with keeping their property.
Our firm can communicate with mortgage lenders and effectively negotiate with them. Having an experienced attorney on your side means that you have an ally who is committed to helping you and is not looking out for the interests of the bank or mortgage lender.
The law firm of Michael H. Schwartz has provided legal representation to homeowners in Westchester County, Rockland County, Putnam County, as well as the Hudson Valley, and New York City for more than 40 years. Contact us by phone or online for a consultation today and let us help you keep your home.
Michael H. Schwartz is the largest filer of bankruptcy cases for people living in Westchester and Rockland counties in New York. A graduate of New York Law School, Michael has been licensed to practice in New York State courts since 1983. He is also licensed to practice in the U.S. Bankruptcy and District Courts for the Southern, Eastern and Northern Districts of New York and the District of New Jersey as well as the Second Circuit U.S. Court of Appeals. He is a graduate of Max Gardner’s Bankruptcy and Veterans’ Boot Camps. Several media outlets have reported on his cases or sought his insights, including The New York Times.
