4 Facts Every Underwater Homeowner Needs To Know About Home Loan Modification Vs. Mortgage Refinance

If you're underwater on your mortgage, you've probably considered both mortgage refinance and loan modification

. But do you really know the difference between these two underwater homeowner options? Before you make a decision, you need to understand how both refinancing and loan modification work, so that you can make the choice that's best for you. Below, we've outlined several key facts about these underwater mortgage options.

1. A loan modification changes your existing loan, while a refinance involves getting a completely new loan. This is the key difference between a home loan modification

and a mortgage refinance. With a loan modification, your lender agrees to adjust the terms of your mortgage (such as lowering your interest rate) either permanently or temporarily. With a refinance, you apply for a new loan, which typically has more favorable terms than your existing mortgage. The new mortgage then replaces the old one.

2. To refinance, you'll need good credit. Because refinancing involves getting a new loan, you're going to need good credit to qualify. If you've already fallen behind on your mortgage payments or are facing other financial problems (such as lower income because of a job loss) getting a refinance is going to be difficult, if not impossible. Refinancing can also be difficult when youre already underwater, because of the discrepancy between your home's current value and what you owe on the first mortgage. However, the federal government's Homeowner's Affordable Refinance Program (HARP) may be a way for some underwater borrowers to refinance their mortgages.

3. To get a loan modification, you'll need to show financial hardship. Your credit score isn't a factor when applying for a loan modification. Instead, with a loan modification, you need to show your lender that you're facing a financial hardship. Often, that involves missing mortgage payments. Missing those payments may cause your credit score to fall.

4. The loan modification process can be slowand there are no guarantees. Applying for a home loan modification can be a lengthy, complicated process, and there are no guarantees that your efforts will be successful. Banks may take months to process loan mod applications, and some homeowners have even reported that lenders have lost paperwork, further delaying the process. In the end, after all the waiting, your application may still be denied. At that point, your only options may be short sale or foreclosure.

Both loan modification and mortgage refinancing have pros and cons. To determine the best option for you, you'll really need to analyze your current situation and make sure you understand all the possible consequences of each choice. Because there are so many variables involved, Homeowner 101 created the Underwater Homeowner Assessment and Action Plan. We work with underwater borrowers to help them understand their options so that they can make an informed decision and move forward with their lives.

Homeowner 101 is an organization designed to give underwater homeowners Answers, Information, and Resources (A.I.R.). We offer the Underwater Homeowners Assessment and Action Plan, a resource for every homeowner who owes more than her house is worth whether youre having trouble making your mortgage payment or not.

by: Molly Castelazo

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