The Difference Between Refinancing a Loan and a Loan Modification

A monopoly house

To refinance a mortgage, a borrower creates a new loan with new payment, terms and fees. To modify a loan, a borrower renegotiates payment, fees, and possibly the terms of the loan with the lender without creating a new loan.

Significance

Until the past fiscal year, a loan modification was a rarity in the mortgage market. With the increase in foreclosures, loan companies are resorting to this option in an attempt to keep borrowers in their homes.

Function

A loan modification allows a borrower to adjust terms, fees and payments on her loan without incurring the closing costs associated with a refinance.

Time Frame

Most lenders will notify borrowers of a specific time frame in which they can apply for a modification, however, any borrower can attempt to refinance at any time.

Considerations

A refinance can allow a borrower to use equity in the home to receive additional cash at the closing table for other debts while a loan modification does not allow a borrower to increase the loan amount.

Misconceptions

Loan modification is not just for borrowers who are in trouble with their mortgage, many lenders are offering it to their customers as a way to prevent trouble before it starts.

References

• HUD.gov: Loan Modification FAQs
• InvestorWords.com: Refinancing Definitio
• BankRate.com: Modify or Streamline Your Mortgage