Refinancing vs. Loan Modification: Which Is Better?
The coronavirus pandemic has had an undeniable impact on personal finances. Amid record levels of unemployment, many Americans are struggling to get their monthly payments under control. This struggle – combined with record interest rate – has led many people to consider a refinancing or loan modification. The question is: what is best for your financial situation?
Here’s what you need to know before changing your loan terms.
Is It Better To Refinance Or Get A Loan Modification?
There are distinct differences between refinancing your loan and getting a loan modification. Before you can determine which option is better, you will need to fully understand the definitions of each, as well as their pros and cons.
What is refinancing?
Refinancing a loan is taking out a new loan and using it to pay off the old one. This allows you to change the terms of your loan or take out more than you owe on your loan in order to use the excess to cover a large expense. Notably, you don’t need to refi through your current lender, so you can shop around for the best refinance rates.
Find out more about refinancing, whether it’s your student loans or mortgage – turn to Crédible. Credible can walk you through the process from start to finish and help you compare lenders and rates in minutes (without impacting your credit score). Plus, it’s free.
For those who have private student loans, you can check out Credible’s rate table, which allows you to compare private lenders based on your loan type, loan amount, etc..
Advantages and disadvantages of refinancing
- You can take advantage of the current low rates
- You can lower your monthly payment
- You can change the terms of your loan (you can switch from a fixed rate home loan to an adjustable rate loan or from a 15 year loan to a 30 year loan)
- You have the option to borrow more money than you currently owe on the house
To increase your chances of getting the lowest refinance rates, be sure to compare mortgage lenders. Fortunately, there are free online tools that make refinancing your mortgage easier. Through by entering simple information, you can pre-qualify in minutes.
- You will have to pay the closing costs
- Your savings will vary (depending on your current interest rate and time spent in the house)
- You will have to start the subscription process again
What is a loan modification?
Rather than taking out a new loan, loan modification involves changing the terms of your existing loan. In this case, you will work with your existing lender to change the terms of the loan to make it easier to manage your monthly payments.
While it is not necessary to repeat the underwriting process for a modification, it is necessary to get your current lender to agree to the change in loan terms. For this reason, loan modification is less common than mortgage refinancing and often only happens if your loan is underwater or you are significantly behind on your payments.
Pros and Cons of Loan Modification
- Accepting a loan modification can sometimes help you avoid foreclosure
- You may be able to get better and more affordable loan terms
- You do not have to pay closing costs in order to modify your loan (although there are sometimes processing fees or legal fees associated with the loan modification, these are often included in your principal balance).
- Changing your loan can negatively impact your credit rating
- There is no guarantee that your lender will agree to change the terms of your loan
- If you miss a payment after modification, it may intensify the foreclosure process
How can refinancing or loan modification affect my debt?
Depending on the type of debt you are dealing with, refinancing and loan modification may be treated differently. Here’s how common types of debt are affected:
While the terms of a mortgage loan modification are often at the discretion of your lender, this process may involve extending the term of your loan, getting a better interest rate, or switching from a mortgage to a mortgage. variable rate to a fixed rate loan to help you save on mortgage payments. Although it is possible to do all of these things with a home refinancing In addition, in this case, you will have more information on the conditions of your new loan.
Visit Credible at explore your mortgage refinancing options and compare rates and lenders.
Student loan debt
Or student loans are affected, your modification options will largely depend on the types of loans you have. Federal student loans, for example, allow you to modify the loan by changing your repayment plan. Notably, income based repayment plans are also available. Meanwhile, private student loan debt modification options often vary by lender.
Although Federal Student Aid provides a means of refinance student loan debt through a consolidation loan, if you are keen to remake a student loan, it will probably be through a private lender.
If you can qualify for a student loan refinance at a lower rate than what you are currently paying, refinancing often has no downside. You can use Credible to compare student loan refinancing rates from multiple private lenders at once without affecting your credit score.
Use a line student loan refinance calculator to get an idea of what your new monthly payments might be.
Personal loan debt
Most of the time, modifying a personal loan is like modifying your mortgage. You’ll work with your lender to change the length of the loan or make your payments more affordable. On the other hand, refinancing gives you the ability to shop around for a loan with better terms.
Are you looking to refinance your personal loan? A online market like Credible can help you see your loan options.
The bottom line
Ultimately, the decision to modify or refinance your loans depends on your ability to pay your current payments. Either way, changing your loan terms could be a way to take advantage of current record interest rates and lower your monthly payments. Do not hesitate to contact your lender to inquire about the possibility of one or the other option.