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Refinancing vs. Loan Modification For Mortgage Relief

The coronavirus pandemic has made paying mortgages harder for millions of Americans. This is why both government agencies and private lenders have come up with ways to help those gravely hit with options like forbearance.


Forbearance is an agreement between the lender and borrower to temporarily postpone mortgage payments. This is done to avoid the lender foreclosing the property. But forbearance depends on who owns the loan and many borrowers need a more permanent solution.


Lowering Mortgage Payments

Borrowers can permanently reduce their mortgage payments through a mortgage refinance or a loan modification. Either option can reduce the payments, but their requirements differ. Refinancing a mortgage involves replacing a loan with a new one and will require an application no different from a mortgage application. Loan modifications, however, change the existing mortgage, but it may negatively affect one’s credit score.


Refinancing A Mortgage

Due to recent events, mortgage interest rates have become friendlier, staying below 4%, making it a viable option in these times. Refinancing does not show up on one’s credit report as a negative event and borrowers that have sufficient equity can utilize it for cash.


But refinancing is not cheap as one will need to pay a closing rate that is 2-5% of the loan. No closing cost options are available, but that often requires paying a higher interest.


To get the lowest refinancing rate available, borrowers must show good credit and proof of income–something that is not possible given the massive unemployment resulting from the impact of the pandemic. For those without a high FICO score and stable income, a loan modification might be a more viable option.


Loan Modification

Loan modification refers to the change in the terms of an existing loan. A lender may agree to reduce the interest rate, extend the time for repayment, or change the loan type, or any combination of the three. The difference between a modification and a refinance is that the former adjusts the loan; not replace it with a new one.


Modifications are attractive to those with lower incomes because they are not dependent on high FICO scores. Loan modification options are generally available to borrowers who have a history of missed payments or imminent danger of foreclosure. However, loan modification has a downside: it can show up on one’s credit report as a negative item. But the recent pandemic has caused regulators to relax their rules.


FDIC Supports Loan Modification

The Federal Deposit Insurance Corporation (FDIC) in April issued a statement urging financial institutions to work with borrowers in modifying their loans. “The agencies encourage financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19,” the FDIC said. “The agencies view loan modification programs as positive actions that can mitigate adverse effects on borrowers due to COVID-19.”


Make The Best Decision

Looking for the best mortgage rates? Call (949) 284-2700 to receive expert advice from a Loanbox Mortgage consultant or visit Loanbox Mortgage for a free quote.

A Canadian native, Noelle attended Ryerson Polytechnic Institute in Toronto where she obtained a Bachelor of Technology in Architectural Science. In 1990 she moved to Southern California and got her start in the mortgage industry. In 1994 she obtained her Mortgage Broker License and has since managed mortgage and private lending companies.
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