Restructuring a mortgage or loan modification is not the same as refinancing it. Modifying the loan allows you to edit the terms of the existing mortgage, such as principle balance, interest rate, PMI (private mortgage insurance) and length of the loan, with the current lender to reduce the payments and get back on track. Refinancing, however, means getting an entirely new loan, either through the current lender or a different lender altogether.
A home loan often requires a long term agreement, which may involve scheduled payments for up to 30 years. Life changes quite a bit in that time frame. Circumstances change and that can require an alteration to the original loan. Choosing between mortgage restructuring and refinancing will depend on your specific circumstances and how far behind the payments are, as well as the current value of the home.
When Restructuring or Modifying the Loan Is Ideal
Loan modification is good for struggling borrowers who can benefit from a lower interest rate, extended terms, or deferred payments. It can make all the difference in keeping the property from going into foreclosure.
There are several methods of loan modification. You can do so simply by paying extra each month to save on the interest over the life of the loan and ultimately reduce the payments by several years. Similarly, you can reforecast the loan if you have a large sum of money to apply to the loan, therefore reducing the payments for the remainder of the loan.
Most often, however, borrowers struggle to make their payments and enter into a modification to prevent it from going into default or foreclosure. The loan must be at least three months behind. The caveat here is that proof is needed to show the reason for financial hardship. Whether you got behind on the payments due to a job loss or having gone through a divorce, you’ll need to prove the loss of income to qualify for this type of restructuring.
Other circumstances necessary for loan modification include: having the loan for at least one year, residing in the home, having enough money to cover the modified monthly payments and not possessing any other FHA-backed loans.
When Refinancing the Loan is Ideal
Refinancing a loan completely replaces the old loan with a new one, possibly even with a different lender. The idea is to obtain a lower interest rate loan to save money over the life of the loan. By reducing the interest rate by just 1%, you can potentially lower your monthly payment by $100 or more.
The new payment is affected by the borrower’s credit score, so the better the score, the better rate you can expect to get. You would need to cover the closing costs as if you were buying a new home. The deal will also be affected by the value of the home. If the value of the home is either maintained or increased, the borrower can benefit from this type of change. If the value of the property has decreased, however, refinancing won’t be a beneficial option.
Loan refinancing is not meant for struggling borrowers. You may be up to two payments behind to qualify, but financial hardship is not necessary. Nor is it necessary to live in the home, so even landlords who rent their properties can qualify for refinancing. Credit scores and income are not qualifying factors. Borrowers can, however, shop around for the best rate, as they do not have to stay with the original lender.
While there are clear differences between restructuring and refinancing a home loan, both options allows the borrower to stay out of foreclosure and keep possession of the property.
Dailey Law Firm, PC is and has been widely recognized as a major force in the field of home loan modification, foreclosure defense and real estate security. The experts of the Dailey Law Firm, PC have the tools to protect you, your family and your home.
Dailey Law Firm, PC 28000 Woodward Avenue, Suite 201 Royal Oak, MI 48067