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When people are having a hard time making their mortgage payments each month, a couple of strategies that often come to mind are refinancing the note or going to the bank to request a loan modification. Both of these processes have a similar outcome — namely, you keep the house, and you keep making payments that are at a friendlier level to your budget. You avoid default and foreclosure, and you walk away with peace of mind. However, there are some significant cost differences to bear in mind, which are worth considering as you choose the right process for your own situation.
Refinancing vs Loan Modification
A loan refinance takes the terms of the mortgage and adjusts them to ones that fit your budget. If you have some available cash and your credit score is still good — and your home’s value hasn’t dipped — then this can be the right option for you. However, you definitely want to take a look at the numbers before you sign on the dotted line for a number of reasons, because you may sit down at closing and see that your payment amount actually went up. How could that happen, especially if the interest rate is lower?
1. Any loan has closing costs, and they roll into the loan in most cases. If you’re refinancing a $400,000 mortgage, you can expect to have $20,000 in closing costs (given a 5 percent average) to get the loan. If you have this saved up, that’s great, but if you don’t, it goes into your principal — which means your payments are going to be higher.
2. If you’ve started to miss some payments on some other responsibilities, such as your car note and some credit cards, and especially if you’ve already missed one mortgage payment, your credit score may have already dropped down a bit. You have to have a pristine credit score to get access to the very best interest rates, and so you may now be in a lower tier with higher rates. These higher rates may mean, once again, that your new payments would be higher than the ones you’re struggling to make now.
Another danger with refinancing has to do with the value of your home. After the collapse of 2008 and 2009, housing values fell off the table in many parts of Western Canada (and elsewhere too). If your current mortgage balance is $325,000, but a sale of the home would only yield $280,000, refinancing with your current lender is not an option, because the value of the home no longer supports financing at the level that you need.
Similar to refinancing, a loan modification also involves altering the terms of the current mortgage and beginning with a new loan, but the purpose of a loan modification is to help a person struggling to make mortgage payments each month. There are several important details worth remembering, though.
1. Loan modification is much like hitting the “RESET” button on your current loan. Rather than adjust the balance, your lender agrees to restructure key terms of the mortgage. The amortization may be extended over a longer period, and the lender may be willing to lower the interest rate. You might even be able to defer a few payments now without penalty. The exact modification that you receive is tailored to meet your current needs.
2. Documentation of financial hardship is the key with gaining a loan modification. If you can show that you’ve been laid off, or if you have a stack of expensive medical bills, this is something you can take to your lender. Simply making some poor financial decisions, such as buying a car that you can’t afford, won’t work, but if you have documentation in place, and you notify your lender as soon as you’re aware that a problem is likely to develop, that lender is more likely to work with you.
If you get the chance to pursue a loan modification with your current lender, that is often the least expensive way to go. However, if your lender will not work with you, Amansad Financial has connections with a number of private lenders and brokerages that offer refinancing, private lending and other ways to get through this situation. Too many people panic when finances get tight, and they end up making poor decisions, or often no decision at all, and they end up in foreclosure. Give Amansad Financial a call today to escape the stress of pending foreclosure!