Loan Modification and Mortgage Refinancing: What’s the Difference?

At first glance, loan modification can look very similar to a simple mortgage refinance. But the trained eye knows that the two are, at best, distant cousins. Each has a very different purpose and each is to be used under very different circumstances.

Let’s take a quick look at a refinance. This is most often done to take advantage of a lower interest rate and thereby allow you to save money on your monthly payment. You might also do this if you want to move from one type of loan to another — from an adjustable rate mortgage (ARM) to a fixed rate for example.

Loan modification, on the other hand, encompasses far more. To start with, you are not refinancing. While a loan modification can result in some of the same benefits as a refinance, you aren’t actually trading in one loan for another. You keep your existing mortgage, simply having it modified to better suit your financial situation. Furthermore, it is typically done when the borrower has reached a point where he or she simply can’t continue to make payments or is at risk of losing the home to foreclosure.

What a “Loan Mod” Can Do That a Refinance Can’t

– Reduce payments even if you’re behind: Lenders often won’t refinance unless you are up-to-date with your payments and in good standing. Not so with loan modification. In fact, being behind with an inability to get caught back up is one of the biggest reasons people turn to this option.

– Force an ARM into a fixed rate: Loan modification requires that you be left with a fixed-rate mortgage.

– Erase Penalties and late fees: Again, if you’re not in good standing, many lenders won’t even offer a refinance. Loan modification removes the requirement for you to pay back delinquent payments along with any other penalties and fees.

– Reduce the principal balance: Under the right circumstances, a lender may agree to lower the overall balance. This can reduce the monthly payment, term of the loan, or both.

What a “Loan Mod” Can’t Do

While loan modification can help make your mortgage affordable again, what it can’t do is force anybody to be responsible with their finances. If irresponsible spending helped put you in a position where you are now seeking loan modification as a savior, then it would do you well to take a good hard look at yourself and get disciplined so you don’t end up in the same situation a few years down the road.

If financial discipline is an issue, investing in a personal finance course may do as much to save your home down the road as loan modification will do in the present.