Refinancing vs. Loan Modification

Homeowners who are struggling to make mortgage payments in these tough times are looking for the best solution and often face the choice of refinancing or loan modification. The two options sound very similar but the difference can mean thousands of dollars to struggling homeowners looking for a fresh start.


Refinancing is rewriting the original terms of the mortgage and it’s an option for homeowners with a good credit score, cash on hand, and a home that has retained its value. When you do the math, however, you may find that the total new payment amount is higher than your original mortgage, which may not be the best option for the struggling homeowner. Here’s why:

Credit Score: You might consider refinancing to a lower interest rate mortgage but that will depend on your credit score. If you’ve missed even one mortgage payment, your credit score may have dropped enough to disqualify you from getting the best rates.

Closing Costs: Usually, you’ll pay around 5% of the total mortgage price at closing. So, on a $200,000 mortgage you’d need to come up with $10,000 to close the deal. If you don’t have $10,000 cash on hand, you can add it to the new mortgage, but that would increase your monthly payments.

Property Value: Refinancing depends on your home’s market value. Let’s say your home was worth $200,000 when you bought it. It is now worth only $175,000, but you still owe $200,000. You owe more than the property is worth, so refinancing won’t be an option.

Loan Modification

Loan modification also rewriting the terms of a mortgage, but loan modifications are specifically designed to help the struggling homeowner. Here are the key points to remember:

Restart Your Mortgage: Loan Modification is a remedy used to bring homeowners current on their mortgage. Mortgage servicers will restructure the terms of the mortgage – lowering the interest rate, extending the terms from 30 to 40 years, or deferring payments altogether – to make it affordable for the homeowner who may have fallen behind on payments.

Financial Hardship: The key factor to be considered for a loan modification is a documentable hardship, like unemployment that reduced the household income, increased expenses, or costly medical bills paid out of pocket.

If you’re struggling to make your mortgage payments and you want to save your home from foreclosure then a loan modification is your best chance for a fresh start.

Q: What is Loan Modification?

A: For struggling homeowners who are behind on their mortgage, or are having trouble making mortgage payments, there is a program that can prevent foreclosure and make a fresh start: Loan Modification. A Loan Modification is a permanent change in one or more of the terms of a mortgagor’s loan, which allows the loan to be reinstated, and results in a payment the mortgagor can afford. Simply put, if you’re a homeowner who has experienced a financial hardship Loan Modification is a way of resetting the clock on your mortgage to you catch up.

Q: What is a financial hardship and how do we document it?

A: You must be able to identify and document the hardship that caused you to fall behind on the mortgage. For example, unemployment, unexpected medical bills, or family emergencies are hardships that jeopardize your mortgage payments. If you can document these hardships with paystubs, bills, unemployment benefits paperwork, etc. you may be eligible for a loan modification.

Q: What happens when my loan modification is approved?

A: When your mortgage company approves your application, you will receive a written modification agreement outlining the new mortgage rate, payment amount, terms, etc. At this point, all you need to do is close the deal. You’ll sign the documents (usually with a notary) and return the forms (and sometimes the first payment under the new terms) to the lender.

Q: I’m interested. How do I get started?

A: Call the “Know the Facts, Keep Your Home” hotline at 1-877-SAVE-183 (877-728-3183). You’ll be assigned a counselor who will help you assess your situation, your options and your next steps – free of charge. The process of applying for a loan modification can seem just as involved as when you first purchased your home. But if you’re struggling to make payments and you want to save your home from foreclosure then a loan modification is your best chance for a fresh start.

Q: What else will my housing counselor help with?

A: Your housing counselor may recommend a loan modification through a reduction in your mortgage interest rate on your mortgage, or an extension of the terms – whatever means are available to make your mortgage affordable. They will also help you package your documents, and submit them to your mortgage servicer for consideration.

Q: I was laid off three months ago and money was tight for a while. I just got a new job so there will be income coming in again, but we are now two payments behind on our mortgage and I’m afraid we might lose our home. Can a loan modification help us?

A: Yes, a loan modification is probably the best solution to give you a fresh start on your mortgage. If you’re behind on your mortgage because of unemployment, or expensive medical bills, or other hardships that have put a strain on your family finances, a loan modification is designed to help homeowners avoid foreclosure.

Q: My new job pays less than my old job, so our household income is reduced. Could we still qualify for a loan modification?

A: Yes, loan modifications are designed to restructure your loan to make it affordable to your current household income. In fact, current mortgage guidelines require that your monthly mortgage payment (including taxes, insurance and home owner’s association dues) be less than 31% of your monthly gross (pre-tax) income. In your case, not only would you be looking at possibly deferring payments with a loan modification, but you may be making lower mortgage payments as well.

Q: A loan modification would reduce my payments? How?

A: The mortgage company may lower the interest rate which would lower the payment. Another option would be to stretch your mortgage payments out over 40 years instead of 30, lowering the monthly payment and giving you more time to pay. Your mortgage company may also decide to defer the part of the mortgage until a later date, also known as forbearance. Our counselors will explain your options when you meet.

Q: How does the process work?

A: Our housing counselors can work with you to determine your eligibility. First, you’ll need to provide information and documents pertaining to your mortgage and your household income. Then we’ll work together to complete the loan modification application and submit it to your mortgage lender for approval.

Q: That sounds expensive. How much does this service cost?

A: There is no fee for these services. The Know the Facts campaign provides this counseling as a service to the community.

Q: How do we get started?

A: Call the Know the Facts hotline at 1-877-SAVE-183 (877-728-3183) and learn about opportunities to make your monthly payments more affordable and save your home.