You’re in a bit of a financial bind, but you have equity in your home. Does it make more sense to refinance your home or ask for a loan modification?
The answer depends largely on the variables that apply to your unique situation and your needs. Here’s what you need to know:
What does refinancing your mortgage do?
A lot of people recently took advantage of the record-low interest rates to refinance their existing mortgage to a lower rate. Refinancing basically replaces your existing mortgage with a new one (and, often, a new lender). When refinancing, you can:
- Lengthen your mortgage term, which can usually lower your payments
- Possibly get a lower interest rate if the current rates are lower than what you have
- Change your loan type, which can help if you have a balloon payment coming
- Allow you to take out some equity, which could help you pay off some bills or do repairs
As attractive as refinancing might be, it won’t do you a lot of good if your finances are in rough shape and you still can’t afford to make your payments. You are also unlikely to qualify for a refinance if you’re currently behind on your mortgage.
What does a loan modification do?
A loan modification has to be done through your existing lender, with their consent. For them (and you) this is all about loss mitigation. Most lenders really would prefer to work with customers than repossess a home. A loan modification can generally get you a lower interest rate, a longer mortgage and more time to repay your debt. They’re particularly useful when:
- You owe more than your home is worth, which can happen if you bought your home during a period of artificial price inflation.
- You’re behind on your mortgage payments and can’t catch up, since the past-due amount can often be tacked onto the end of your loan.
- You’ve had a change in income that makes it impossible for you to keep up with the payments unless they’re lowered a little bit.
If you’re worried about foreclosure, find out more about your legal options. You may be surprised at what’s available.