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Mortgage Refinance vs. Mortgage Loan Modification Program
Is a mortgage loan refinancing different than a loan modification? The short answer is absolutely yes, except that they both theoretically have one thing in common, the goal of saving money.
According to the Mortgage Professor, "saving money" from refinance means that "over the period you will hold the mortgage, the total costs net of offset (savings) will be lower on the new mortgage than the existing one". This is most likely because refinancing includes paying for points and other settlement costs that are either paid upfront or added to the mortgage balance.
Saving money from modifying a loan is simply the result of lowering your mortgage payments by reducing your interest rate substantially during the first 5 years of the modified loan and not having to pay points or closing costs. Also modifying an interest only loan to a fully amortized fixed rate mortgage will also ensure that you are paying down your loan principal amount.
Mortgage loan refinancing is most popular during a stable or prospering market. Mortgage loan modifications are more relevant when mortgage property values drop significantly, which is the case in present economic times and mortgage meltdown, when, according to Moody's Economy.com, 30% of mortgaged homes in the U.S are worth less than the debt outstanding on their homes, or are underwater.
Qualifying for refinance.
Since most lenders have tightened up their guidelines for refinance, refinancing has become much harder in the past few years. Few of the guidelines that lenders weigh in their decision include: (1) A Debt-to-income ratio – where your house debt payments are no more than 38% of your monthly gross income; (2) A loan-to-value (LTV) ratio – One not higher than 80% - Assuming you are not borrowing any additional money during your refinance and you are simply trying to get a lower interest rate, your mortgage loan amount should be at least 80% or less that of your property market value (Here is an example: if you loan is 100K and the property market value is 125K, then your LTV is exactly 80%. This is a good starting point assuming you are paying any points and closing costs out of pocket); (3) Your credit score – a credit score in mid 700 is most likely required.
And even if you qualify for a refinance, is it worth it?
Not always! Among the many reasons to make sure a refinance is worth it, you have to consider your breakeven period which depends on the cost of refinance and the time you plan to hold on to your house. Here is a good article on things to know before you refinance.
Qualifying for a loan modification.
Loan modification programs have become an alternative to loan refinancing especially if (1) you have a loan-to-value ratio above 100%, (2) you have encountered a financial hardship, and (3) may have missed a mortgage payment. Additionally, your credit score is not taken into consideration for approval. So in order to limit or lower the risk of default, banks are willing to consider you for a loan modification.
But what is best for you?
Both have advantages and limitations depending on your situation. Here is a summary of the differences between a loan modification and a mortgage refinance that is helpful in the decision-making process:
• A loan modification restructures an existing loan
• Borrower is at risk of default
• Borrower has experienced financial hardship
• (this could be simply from an adjustable rate mortgage reset)
• Credit score is not important
• Borrower pays no point or closing cost
• No appraisal is needed
• No Escrow or title is required
• Completion time can vary between 60 to 180 days
• A pre-modification debt-to-income ratio must be higher than 31% and a post modification debt-to-income ratio must be met
• Should feature a lower interest rate
• A new loan replaces an existing one
• Borrower is not at risk of default
• A loan-to-value ratio lower than 80%
• Borrower has not experienced financial hardship
• Credit criteria must be met
• Borrower pays closing costs
• Appraisal is required
• Escrow and title are required
• Completion takes 30 to 60 days
• A pre-refinance debt-to-income ratio should not be above 38%
• Rate subject to current market conditions
For more information please visit http://www.mycaal.com