Children headed off to college, loss of employment, a mortgage poised to jump several points or plans to build an addition to a home are all reasons people decide to adjust their mortgage. Mortgage adjustment involves two types of products: refinance and modification. Understanding the difference between mortgage adjustment options and choosing the right product are important for anyone preparing for a big financial change.
What Is the Difference Between a Refinance and Modification?
The loan refinance process replaces an existing mortgage with a new one. Generally, people seek refinancing to achieve more favorable terms. For example, if a homeowner has an adjustable rate mortgage, she might consider a refinance to take advantage of a fixed rate mortgage or to lower her payments. Loan modifications are available for people experiencing financial difficulty. The product offers a temporary or permanent change in mortgage terms.
What Are the Benefits of Refinancing?
People choose mortgage refinancing for several reasons. One of the biggest benefits of refinancing is equity–if the home has any. The refinance process will make the equity in the home available to the homeowner. For example, if the original mortgage for the home was $200,000, but the home is now worth $230,000, the refinance will place the $30,000 in the homeowner’s pocket.
Despite the benefits of refinancing, multiple challenges exist. Homeowners interested in the product must have a solid credit history; late payments in the last twelve to twenty-four months will disqualify most people from the loan. People who have credit blemishes generally turn to loan modification to meet their financial needs.
What Is a Loan Modification?
People experiencing demonstrable financial challenges can use a loan modification to create more favorable mortgage terms. Generally, people who experience difficulty paying their mortgage or who are facing foreclosure work with their lenders to make the payments more affordable. Lenders offer different modification terms, including changes to the mortgage rate or monthly payment amount. In addition, some lenders will roll the past due balance back into the loan.
How Do People Apply for Mortgage Adjustments?
The mortgage adjustment application process is similar to the process of obtaining an original mortgage. The homeowner’s financial standing plays a significant role in the process. Choosing the right product depends on a number of factors and each individual’s situation is different. Ultimately, considering the long-term consequences of pursuing an adjustment are most important.
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