Loan Modification Vs. Loan Refinancing

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Even among the people who have to make mortgage payments they can’t afford, there are a few lucky ones who get their loan modified. They just need to pay a few hundred dollars to their lenders and their interest rates are reduced. Though asking for modification doesn’t hurt, the majority of applicants aren’t so lucky.

Loan modification is pretty painless, and you are just required to sign a couple of documents. But what happens on the ground that most of the big lenders sell their mortgage loans in the secondary market. In that case, refinancing is your only option. It doesn’t, however, mean you have to change the lender. Try refinancing with your current loan servicer first, if they agree, you’ll have to undergo less trouble, and sign fewer papers.

What’s the difference? You might ask. A modified mortgage is the same loan that you keep paying in a different form. With refinancing, you start again with a new loan. For example, if you have taken a 30 year mortgage, and have paid the installments for five years, you still have to pay for the remaining 25 years. In loan refinancing, the old loan is paid off by the loan refinancing company and you start paying a brand new loan.

Again, all the mortgages cannot be modified. The reason is most of the lenders don’t keep your loan with them for long. They sell those to government entities like Fannie Mae, Freddie Mac and they in turn bundle the mortgages together thus creating mortgage securities. These securities are then bought by the investors. In simple terms, your loan has been changed beyond recognition. It’s like asking for your sugar after it has been used in making a chocolate cake and you don’t even know who bought it. Only portfolio lenders are the ones who can modify the loans because they keep the loans on their books and don’t sell these to others.

Refinancing the loan on the other hand requires less paperwork, because you won’t need any appraisal or credit report which would otherwise have cost you $350. The main point here is again the same, go to your loan servicer first and ask them if they have something for the existing customers.

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