Loan Modification vs Refinance: Which Is Best For You?

Being a homeowner is one of the largest financial commitments a person can make. Homeownership can become difficult to maintain, however, if your financial situation fluctuates, often calling for adjustments. Loan modifications and loan refinancing are two options that can help you achieve more favorable terms on your mortgage, but which is best for you?

What Is Loan Refinance?

Loan refinancing is the act of replacing your existing loan with a new mortgage, allowing you to change the term of your loan. This is most helpful if you are looking to take a lower interest rate, change the duration of your mortgage term, change your loan type, or take cash out of your home equity to pay off other external bills.

How to Refinance Your Loan

If you're not underwater on your loan and have equity, you can:

1. Choose a lender by submitting an application with your personal financial documentation.
2. Lock into your interest rate if given the option by your lender to protect against market fluctuations.
3. Get another appraisal to make sure your lender isn't loaning you more money than your home is worth.
4. Once complete, your lender will give you a Closing Disclosure document that should be carefully read, as it defines the terms of your loan and closing costs.
5. Attend the settlement (closing) with your lender and sign your new loan.

What Is Loan Modification?

Loan modification is a direct change to the original terms of your current mortgage loan, including updates in loan term, interest rate reduction, loan structure changes, and principal forbearance. Unlike a refinance, it doesn't pay off your current mortgage but simply amends what you already have.

When to Use Loan Modification

1. If your loan is underwater.
2. If you need a principal reduction.
3. If you're behind on your monthly payments.

How to Use Loan Modification

1. Contact your lender's servicing department to apply.
2. Submit proof of income (including tax returns) to prove you're unable to cover your current mortgage. 
3. Submit bank statements so your lender can confirm your assets.
4. Submit a hardship statement that communicates why you are unable to make your monthly payments or pay your entire loan balance to your lender. Any additional supplements to your hardship claim (ex: medical bills, termination letter) is helpful, as well.

Loan modification is usually reserved for the most extreme hardship cases, while refinancing is far more common. Which option is best for you depends on your specific financial situation. To get a better idea of which route you should explore, consult with the professionals at Butler Mortgage. 

Get Loan Solutions from Reliable Mortgage Professionals

For over 25 years, Butler Mortgage has assisted both first-time and seasoned buyers within the state of Florida and now offer our services in Georgia. We can provide you with professional advice on a wide range of loan and credit solutions to help you obtain a mortgage at a favorable rate. To learn more, call us today at 407-931-3800 or fill out our free consultation form online.