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Loan-Modification vs. Refinance

Loan Modification vs. Refinance?

Options for Underwater Home Owners: Loan Modification vs. Refinance?

Many homeowners with mortgage payments that are now or soon to be out of reach are wondering what their options are for getting their heads back above water. Two options include refinancing or loan modification and although each are similar on the surface, each should be considered carefully to determine the best course of action. The first step in knowing which is best for you is knowing exactly how they differ.

A refinance replaces the existing mortgage with a new loan under different, more favorable terms such as a lower or fixed rate. A loan modification is an adjustment to the terms agreed upon by the lender and the borrower to help the borrower get back on their feet, but the original loan is still in place. In the case of a refinance, borrowers can shop for different lenders and search for the best rates and terms. In a loan modification, the original lender is doing the restructuring.

Although mortgage rates are at historic lows, it is unfortunate that many California homeowners are unable to qualify for refinancing. Most homeowners cannot qualify for refinancing due to lack of equity or low credit scores. Luckily, these factors do not disqualify homeowners from restructuring or modifying their mortgages. A loan modification can provide lower monthly loan payments by lowering your interest rate, lengthening the term or other features designed to help you avert foreclosure. Often times, in fact, lenders are willing to modify mortgages below market interest rates, often as low as 2%, which is better than a refinanced rate.

There are several pros and cons for refinancing vs. modifying a loan so homeowners should make sure to research all of their options and speak to a specialist to determine which program they can qualify for and which option will be the most beneficial for them.

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