Loan Modifications vs. Traditional Mortgage Refinancing « Loan Modifications

Loan Modifications vs. Traditional Mortgage Refinancing

There are many differences between loan modifications and refinancing. However the main difference stems from the financial opportunity provided; Refinancing relates to obtaining a whole new mortgage, whereas a loan modification is simply changing the essential terms of the homeowner’s present mortgage. When you refinance your mortgage you are paying off your existing mortgage with a new mortgage thereby change your payments for the life of the new loan. The two largest facts that come into play in determining if a homeowner will be approved to refinance is their credit rating and whether any equity exists in the home.

A loan modification generally is considered a temporary solution to a homeowner’s inability to comfortably pay the full mortgage, or to wait out an uncertain real estate market. According to Michael Hall in the Practicing Law Institute Corporate Law and Practice Course Handbook Series, March 2008, homeowners will be moved into a lower fixed interest rate, for five or more years. The most significant benefit of a loan modification is that credit scores do not come into play. Under many state laws, (for example M.G.L. c. 93A) if you want to get help negotiating a loan workout or modification, an attorney must negotiate with the bank on the homeowner’s behalf based upon your hardship. There are no closings needed in a loan modification. As such, there are no closing costs, no points being paid, no new title insurance fees, no application fees, or any other fees typically incurred in traditional mortgage transaction.

There are Federal loan modification programs such as the Home Affordable Modification Program (“HAMP”), however, traditional loan modifications are conducted by the bank under no specific program. Each lender has its own set of rules to determine whether a consumer can qualify for a modification. Some lenders will look at the homeowner’s other outstanding bills; if the homeowner is in financial distress and whether there is equity in the home. Some lenders will look to the amount of time the homeowner has gone without making a mortgage payment. Sometimes the modification will be as simple as moving from an ARM loan to a fixed mortgage rate, or if there is a FHA loan involved, the homeowner could qualify for a partial claim. A partial claim, according to Brian Heaton, in the Indiana Law Review of 2005, is when the loan is brought current and a lien is placed on the property for the outstanding balance until the property is sold or refinanced.

The benefit to a homeowner of conducting a loan modification is rather obvious, in many cases a very large reduction in monthly mortgage payments. Additionally, under the HAMP program, should the monthly payment be reduced by 6% or more, homeowners are eligible to receive $1,000 per year for up to five (5) years against their principal.

Should you wish to learn more about traditional loan modifications or those pursuant to the Federal Govenment, you should contact a local bankrutpcy or consumer debt lawyer in your area.