Modify Loan Rather than Refinance to Cut Closing Costs

Is it a good idea to modify your loan rather than refinance to cut down the closing cost? Especially if your are trying to reduce interest and lesson years to pay.

3 Answers

This question will need to be answered on an individual basis. Begin by asking the following questions to see if the "better" option comes clear:

  • What is the going market rate for my mortgage, if I were to refinance? What is the modified rate that I am being offered?

  • How many years remain on the current/modified mortgage? Will I pay for longer with the refinance I am considering? How many years longer?

  • How many years do I plan to keep this home?

  • Will my credit be affected if I modify? Is this important to me?

  • Is the modification a fixed, permanent, and predicatble rate? Is the refinance?

  • Once you have anwered these questions, put the two scenarios side by side:

  • Which offers the lower payment? What percentage of that payment is interest?

  • What is the difference in "closing/modification" costs? Is there a "lender-paid closing cost" option in either case?

Any number of mortgage calculatorsonline will help you evaluate the total amount (in $$) of interest that you will pay on the remaining term of your modified loan. Compare this figure to the anticipated interest on the new loan at the current market terms.

If you do not plan to be in the house that long . . . use the amortization schedules that are generated by the mortgage calculator to compare just the years that you plan to be in the home. How much interest will you pay during that time period? What will your principle balance be at the end of that period of time? The goal, obviously, would be to pay less interest and have a lower principle balance when you dispose of the property.

Compare the difference between the interest costs and principle balances for Refi / Mod  at the end of the time period you plan to stay. Is it enough to off-set the additional cost of closing?  The better financial decision may be emerging . . .

Loan modifications are, and were never meant to be an alternative solution to refinancing. Loan modifications are available to those who have a proof of hardship and cannot refinance, so as a last ditch effort to save the home from foreclosure (because banks do not want to foreclose) a bank agrees to a modification. If you qualify for a refinance, you will 99.999% of the time be denied a  loan modification. Why? Because your debt to income ratio, loan to value, credit, and assets, support a new loan - you have no hardship, therefore no modification - so your only option is to refinance.

If a particular loan modification company suggested this as an alternative solution - they are "selling" you. Next time you talk I would request all their licensing information and research it with your local Department of Real Estate, and Better Business Bureaus.

As a licensed broker myself I will say a considerable sum of loan modification companies are operating outside the scope of the law, and many consumer advocate groups are beginning to target modification companies as the next breed of predator in the real estate market.

If you can refinance - that is your only option - refinance. If you are denied your refinance, that is when you can start considering a modification.

Moreover, successful modifications are usually short term solutions, and do not support long term plans, because the modification usually ends with you securing an ARM, fixed for a slightly longer period than you may have now, with a lower interest rate. Because most are adjustable rate mortgages, and with inflation looming in the near future getting into a low adjustable rate mortgage with high cap rates and frequent adjustments, is like an ostrich sticking its head in a hole in an attempt to hide from hungry circling hienas. You may feel a little better about your situation, but the danger is still out there, and you must not look at a modification as a permanent solution.

There is no question - if you have the option, despite higher closing costs - refinance. You will be happier in the long run.  

I am a loan officer doing business in California, as well as working on No Upfront Fee Loan Modifications, I completely disagree with the answer above regarding a loan modification being a short term result.

Most of the time, the client is given a 30 or 40 year fixed rate loan that is fully amortizing. It is important to stress that the lender wants you to be in a long term solution.

Loan modifications are done during a hardship, when a refinance is not available because of job loss, illness, or perhaps an Option ARM loan that is out of control. Those are just three reasons why a person might work on getting a loan modification.

If your loan needs to be modified, you can submit your scenario to your lender and if you keep on them continually, you may be successful. Those that aren't successful might need help and you should seek it before decide to give a house you want to keep back to the lender.

I help my clients with refinancing when they have income and equity to do so. There are also some programs passed to help homeowners who don't have suffienct equity as well.

In addition, FHA loans can be streamline refinanced or are now available for modifications due to hardship and loss of value.

I suggest that you check from more than one source and spend a few hours looking around on the web.