Have you failed to cover your recent mortgage installments? Is your interest rate too high? Although you probably worry about losing your home, there are certain solutions that can save you from foreclosure.
Loan modifications and refinances are both appropriate alternatives, providing specific advantages and disadvantages. Research is essential for borrowers to understand the difference between them and apply for the right option.
Have a look at the main differences.
Mortgage modification
A modification is a suitable choice for borrowers who wish to make changes to the original terms of their mortgage. You can modify your loan only through your current moneylender, as you need its consent to change the conditions. Such modifications usually include adjustments like extending the term, reducing the interest, changing the structure, etc. Read more on the topic of loan modification.
For example, a loan term extension provides borrowers with more time to pay off their mortgage while lowering the monthly sum. Another adjustment that reduces the payments each month is the reduction of the interest rate. Also, borrowers can have their loan modified from an adjustable interest rate structure to a fixed one. Borrowers living on a fixed income find this modification helpful, as it makes the payments more predictable.
Moreover, principal forbearance is a rare type of loan modification when lenders agree to set a portion of your principal balance aside to be repaid later. Nevertheless, such modification is possible only in cases when there’s no other solution to prevent foreclosure. Borrowers must subscribe to a plan for repayment to be considered qualified for getting a principal forbearance. Lenders rely on this plan to check whether borrowers can handle the new payments.
A loan modification is more logical for some borrowers compared to a refinance. For instance, individuals with an underwater loan may find this option beneficial. A mortgage is considered underwater when the borrower owes more money than the current worth of his/her property. This is likely to happen when a person fails to pay the installments at the beginning of the term or lives in a region where the value of properties lowers gradually.
Furthermore, individuals behind on their payments are forced to seek a modification, as they won’t be allowed to refinance. If planning to modify your home loan in Florida, make sure you send the necessary documents. The standards of lenders regarding modification tend to vary, but the largest part of them requires financial documentation. Borrowers need to provide proof of income, such as a salary contract from the employer, stating the income on an annual basis.
Additionally, applicants are required to provide their most recent tax returns, bank statements, and hardship statement. Bank statements serve to confirm the assets, whereas a hardship letter explains the reasons for no longer being able to pay for the balance. Additional documentation should be included with the letter, such as medical bills or a letter of termination from your former employer.
Refinance
Refinancing a mortgage means replacing the loan you already have with a new mortgage. A refinance is suitable for borrowers looking to lengthen or shorten their mortgage term. Some individuals are interested in shortening the term so as to own their homes sooner. Also, if the interest was higher when you got the mortgage, a refinance can provide you with a lower rate.
Moreover, a refinance is beneficial if you plan to change the loan type, provided you have over twenty percent equity in your property. Many individuals apply for an FHA loan, which obliges them to pay mortgage insurance until they pay it off. Nevertheless, you can refinance your FHA credit to a conventional one and cancel the insurance.
A cash-out refinance is also possible, allowing borrowers to draw a certain sum from their equity to cover other expenses, such as credit card debt. If your principal is $100,000 and you need to cover a debt of $10,000, a cash-out will provide you with a principal of $110,000, $10,000 of which will be given to you by the lender in cash. See this URL, https://www.wikihow.com/Prepare-to-Refinance, for some tips on preparing to refinance.
Final thoughts
Detailed research is a must before making such an important decision!