Loan Modification And Loan Refinancing What Is The Difference

Mortgage refinancing , mortgage modification, debt relief, debt consolidation, debt settlement companies… As the financial times worsen the finance terms you hear and need to understand increases. Unfortunately understanding key terms is vital if you want to make the most of the options open to borrowers in trouble. It is not advisable to trust solely in banks or debt relief companies their interests are not your own. It does not mean we have to become economists or even debt relief experts but simply understand the basics of debt and the options at your disposal.

Loan Or Mortgage Modification
Loan modification involves changing the existing contract. These changes can involve reducing the interest rate or extending the tenure or term of the loan. The key word here is changing the existing loan not starting a new one. The current Mortgage Plan that the Obama administration is pushing so hard focuses on loan modifications to reduce the monthly payments of borrowers that are struggling to pay them and risk losing their homes.

Loan / Mortgage Refinance
Loan refinance refers to cancelling an existing loan or mortgage and signing a new contract. The new contract or loan will generally provide some benefits to the borrower. For example a borrower might look for a mortgage refinance to reduce his monthly payments, increase his loan principal (i.e. borrow more) or reduce the term of the loan in order to pay less interest on the mortgage.
This option is especially interesting to borrowers who might be managing to pay their loans but want to take advantage of the lower interest rates now on offer. They can take on a new mortgage with the lower interest rates or other benefits and use it to pay off their existing mortgage or loan.

Loan Modification versus Loan Refinance.

Loan modifications tend to be “free” or at the very least cheaper than loan refinancing. Loan modification can involve a loan settlement where the bank agrees to reduce the loan. This will however affect your credit record and there is not guarantee the bank will agree to do it. Loan refinance can be expensive especially if the pre-payment fees (fees for paying the mortgage or loan early which will mean less in interest for the bank) are high. In fact high prepayment fees could make the mortgage refinance uneconomical so make sure you have done your homework before signing the dotted line. Prepayment fees are not the only expense related to loan refinance. You will have to pay for all the costs linked to a new loan, valuation, account opening, processing fees, insurance, etc… However you are in control of the situation and as long as the numbers add up you decide if you want to do it or not.