Choosing Loan Modification Instead of Refinancing Your Mortgage

|Guest Post by Dick Critchlow|

Many people look toward refinancing as a way to reduce the payments on their home mortgage loans, but they are more likely to find a loan modification program more advantageous. Not only does loan modification provide debt relief for the consumer, there is a great deal of loan modification assistance available from many different sources including the government. These loan modification services can provide assurance that the consumer receives the best possible debt reduction that is possible for his or her individual circumstances. Loan modification provides some of the following advantages over refinancing.


Reduction in the Interest Rate


When homeowners refinance their home mortgage, the interest rate is one the borrower and lender negotiate contingent upon the current market rate and the borrower's individual circumstances. When a homeowner applies for modification through a federally sponsored program, the interest rate must allow the payments to fall within the payment structure: 38 percent or less of monthly income. In addition, if the loan payments must extend for a longer period of time to meet this requirement, it will also be a provision of the loan modification.

Additional Payment Reduction

When a borrower refinances a mortgage, he is responsible for the new monthly payment. Under a federally sponsored loan modification program, the government will subsidize those payments so that the borrower will never have to pay more than 31 percent of his family income toward mortgage payments

Minimize Costs of Refinancing

When a borrower refinances his home, there are fees associated with the loan similar to the closing costs you incur when you first buy a home. It will usually be necessary to pay all the fees up front, but in a loan modification all the costs of securing the loan are included within the loan eliminating the borrower needing cash up front.

Problems that May Prevent Refinancing

Another problem that may plague those looking to refinance is a change in credit standing and a decrease in the value of your home. Both of these problems can have a negative affect of those looking to refinance their homes, but loan modification programs do not take these factors into consideration. They are mostly interested in your income and how you have attempted to keep up with your payments before applying for loan modification.

Incentives for Borrower and Lender

Refinancing is an agreement between the borrower and lender while a federally sponsored loan modification involves the government. The Obama loan modification program provides lenders with incentives for closing a loan modification deal and will provide further incentives as the borrower continues to maintain the new lower payments.

While not all borrowers will qualify for loan modification, not all borrower will qualify to refinance their home mortgages either. However, because federally sponsored loan modification programs are controlled by the government, it is more likely a borrower will qualify for loan modification than refinancing. Before you make any decision weigh all the options first and make sure you know what each program entails both now and in the future.