What’s the difference between a refinance vs. a home loan or mortgage modification?

What’s the difference between a refinance vs. a home loan or mortgage modification?

If your mortgage lender has sent you a letter demanding that you pay all of your past due payments as well as any late fees, penalties and legal fees in order to get current, then the process they’re working on is called refinancing your loan. Your lender views overdue amounts as a default on your home loan. This requires them to demand that you catch up, or they have to ban you and take your home. Can a home loan modification avoid this process and get you electricity without having to pay that much? If yes, then why is this true? You may ask what is the difference between a refinance and a home loan modification?

The demand letter the borrower receives is based on the terms of the loan. It only allows payment of the payment as described in your loan documents. If you are late with your payments, you will still have to honor the terms of your agreement with the lender. There is no language in your loan that allows for changes. Therefore, the lender has no option but to collect or foreclose. You are in default and the only contractual way to become current is to pay all past due amounts. Then your loan is “recovered” and you can keep your home as long as you keep making your payments on time. This process is called recovery.

But the problem with the recovery process is that if you fall too far behind, you won’t be able to find enough money to catch up all at once. The language of your loan then triggers a foreclosure that you cannot stop.

Unless… You are able to enter into an agreement with your lender to “change” the language and terms of your loan. This type of situation requires a “modification” of your loan. You change the terms so you can continue to own and pay for your house. This will include reducing your interest to lower your monthly payment and taking your unpaid payments and putting them back into your loan. The new terms would have the effect of creating new monthly payments that would be available to you. Your monthly payments will now fit into your monthly budget.

Why would a lender do this? Because your lender loses a lot of money when they foreclose. It’s complicated, but the costs your lender must pay can include:

1. The cost of the foreclosure process going through the court system.

2. Your home will probably sell for less today than it did just a few years ago because of the economy. If your creditor gets less than you owe them, then they lose that money.

3. Caring for your home while it’s being sold. This includes large broker commissions, utility bills and maintenance.

4. The lender borrowed money from an even bigger lender to loan you the money you used to buy your home. Your lender must pay this back.

5. While your home is in foreclosure or for sale, your lender cannot use it as an asset on the bank balance. They are then criticized by government regulators.

So what does your lender want? First of all, the lender wants you to catch up on your payments yourself and get a refund. If that’s not possible and you can identify the problems you had that forced you to fall behind, then the lender wants to work with you. The lender wants you to show what’s wrong; what is different today; and what amount you can afford. Then they need to see if they can make your plan work from their perspective.

If you can agree on terms that work for both of you, then you can change the wording or terms of your loan to incorporate the new agreement. You will not get a new loan or refinance loan. You’ll do a “home loan modification,” which simply changes some of the terms of the loan so that it now includes your new covenants.

Home loan modifications are happening thousands of times a day due to the current housing crisis. You can do it yourself if you are familiar with the process. However, this can be difficult. I would interview several experts on the home loan modification process. Find out what they promise, what they charge, and whether they’ll accept payments. For my recommendation, see my resource box below.

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