Can I Change My Mortgage?
The majority of home buyers take out loans called mortgages to afford their homes. Mortgages typically require borrowers to make monthly payments which include interest on the loaned funds. Mortgage payments are often one of the largest expenses homeowners face and in some cases, financial hardship or poor financial planning can make it difficult for homeowners to pay a mortgage. There are ways, however, to alter the terms of a mortgage.
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Mortgage Refinancing
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Refinancing is a common method of changing the terms of a mortgage. When you refinance a mortgage, a new lender buys out your existing loan and offers you a new loan with different terms. Refinancing can alter the length of the mortgage, the interest rate or switch from variable interest rate to a fixed rate or vice versa. Mortgage refinancing is common after periods of falling interest rates, since it allows owners to lock in at lower rates.
Refinancing Pros and Cons
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The primary benefit of refinancing is the potential to gain a lower interest rate. If your credit score has improved since you originally took out your mortgage or interest rates are low, refinancing can result in significantly lower interest rates. Refinancing can also result in lower monthly payments by transforming a 15-year mortgage into a 30-year mortgage. The primary drawback of refinancing is that it can be a costly process if you do not plan to stay in your home more than a couple of years. According to the U.S. Federal Reserve Board, refinancing commonly costs 3 to 6 percent of the mortgage's outstanding principal.
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Loan Modification
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Loan modification is another method to alter the terms of a mortgage. Loan modification is meant for people in danger of missing payments. Lenders may be willing to modify mortgages to help owners make payments since it can be costly for lenders if borrowers walk away from mortgages or declare bankruptcy.
Pros and Cons of Loan Modification
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Loan modification can be beneficial to both lenders and borrowers. For borrowers, it can reduce mortgage interest and therefore reduce the mortgage payments, which may allow a cash-strapped family to stay in a home. For lenders, it can prevent costly foreclosures. On the downside, loan modifications may keep borrowers in homes that they have to stretch to afford. In addition, loan modification might hurt borrowers' credit scores.
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