If you're having trouble making your mortgage payment, there are ways to relieve the burden of high payments without going into foreclosure.
Loan modification and refinancing are a couple of ways you can alleviate some of the financial burdens of your mortgage and give you some breathing room.
Below we look at the benefits and drawbacks of each so you can make an informed decision about which option is best for your unique circumstances.
What Is a Loan Modification?
A loan modification is when your lender agrees to change the terms of your initial loan. A modification doesn't pay off your balance like a refinance does but instead gives you some options to change your loan's conditions.
It is important to note that a loan modification can negatively impact your credit, so applying for a refinance might be a better option if you’re current on your payments.
To secure a loan modification, you must apply with your current lender. Some modifications your lender might approve you for include:
- Loan term changes: If you’re struggling to pay your mortgage, your lender may be able to extend the terms of your loan, giving you more years to pay on your balance and reduce your payments.
- Interest rate reduction: If interest rates are currently lower than your original terms, modification can help you take advantage of lower rates and lower payments.
- Loan structure changes: If you are currently paying on an adjustable-rate mortgage, your lender might approve you for a fixed-rate modification, making payments predictable.
- Principal forbearance: Your lender might agree to suspect part of your principal until later, temporarily lowering your payments.
There is no guarantee that your lender will offer you a loan modification. Often, securing a refinance is easier than a loan modification.
What is a Loan Refinance?
A mortgage refinance means your current loan is replaced with a different one. A refinance allows you to change the terms of your loan, and you can even get cash out via the refinance process.
A loan refinance can result in
- Longer terms: Lower your monthly payments with longer loan terms.
- Shorter terms: Pay off your balance faster and save money on interest.
- Lower interest rates: Take advantage of lower interest rates than your original terms.
- Change of loan type: If you have more than 20% equity in your home, you might be able to refinance into a different loan type.
- Cash out: Take out money from your home to cover other expenses.
Which Option is Best for You?
If you want to avoid negative credit marks, a refinance might be the better option. But if you're underwater on your home or delinquent on your payments, a modification will be your best option.
No matter which option you choose, beginning a conversation with your lender is necessary to collect the correct application form and application materials from you, which can include proof of income, demonstration of hardship, bank statements, and more. Your lender will be able to tell you what is needed to initiate the process.
When you're struggling to make your mortgage payments, know that relief is available. Start with your lender to better understand the options that may be open to you.