What is the difference between mortgage refinance and modification? Fundamentally, mortgage refinancing involves changing the terms of your mortgage to something more suitable for you. In effect, you pay off your existing mortgage loan and replace it with another with terms more favorable to you.
Mortgage modification is a way of making the mortgage more affordable to somebody in financial hardship. You keep the same mortgage, but change terms such as interest rate or even the principal still owed. Here is more information on each of these options.
Mortgage refinance involves changing one mortgage for another. The lender will check your credit record and FICO score, just as if you were getting your first mortgage. If you have any delinquencies with your current mortgage, you will be unlikely to get a mortgage refinance, but could get a mortgage modification!
Your home would also be reappraised to make certain that its value covers the loan. Then, assuming the mortgage refinance was granted, you will have the whole closing procedure to go through again, along with the closing costs that a mortgage involves. You are fundamentally arranging a new mortgage, but one that either suits you better than the original or that enables you to use some of your equity for your own uses.
If you have problems maintaining your monthly payments, your lender might agree to a mortgage modification. No appraisal is needed and a full credit search is also unnecessary. However, the lender will need some form of assurance that you can repay the mortgage under the new arrangement. A statement of income and expenditure will likely be acceptable for this.
An appraisal is not needed – in fact, you will likely owe more than the value of your home. That is often why a mortgage modification is required. Any outstanding or delinquent payments can often be rolled into the modified mortgage along with any legal fees so you have no lump sum to pay.
Mortgage Refinance or Modification?
If you are struggling to meet your current mortgage payments, then a mortgage modification would be worth considering. If you are current with your mortgage, but would like to refinance it to take advantage of low interest rates for example, then mortgage refinance enables you to achieve that.
The two are fundamentally different and rarely alternatives to each other. It is not a question of mortgage refinance or modification, but if you do have the option, keep in mind that mortgage modification is a good bit cheaper to arrange than refinance!