Mortgage relief options — refinance or loan modification?

If you are one of the millions of Americans facing financial difficulties due to the coronavirus pandemic, you may be looking for ways to save money on your mortgage. Many people are struggling with job loss or reduced hours at work, making their once-affordable mortgage payments, less affordable. Fortunately, the Federal Reserve considered the potential ramifications of COVID-19 and took preemptive steps to help encourage consumer spending.

Near record-low interest rates could make a home refinance or loan modification a beneficial option for some homeowners. If you are struggling to pay your mortgage, you may want to consider one of these options:

Home refinance vs. loan modification

Homeowners have two significant options that don’t involve taking out additional debt to help assist with the cost of their loan.

Home refinance

Refinancing your home, replaces your old mortgage with a new one. A refinance allows you to change the terms of your loan, like extending your loan terms, shortening your repayment terms, reducing your interest rate or changing the type of loan you have. If you don't know where to start with sizing up mortgage rates, using a tool like Credible can make it easier. Credible finds the best refinance rates for you so you can choose the refinance loan that fits your needs.

MORTGAGE RATES HIT NEW RECORD LOW — HOW REFINANCING NOW COULD SAVE YOU MONEY

Pro: You could save money on the total cost of your loan. Refinancing at a lower rate could potentially save you thousands of dollars.

When you refinance your home loan for a lower interest rate, you’ll save on the total cost of interest paid over the life of your loan.

For example, if you owe $200,000 on your mortgage for another 20 years at 4.5 percent interest rate, you will pay about $103,670 in interest. However, if you can refinance your loan to a 3 percent interest rate, you will pay $66,206 in interest. That’s a savings of $37,464.

Find your rate now by inserting some information into Credible's free online tool.

WHY IT'S A GOOD IDEA TO REFINANCE YOUR MORTGAGE WHILE RATES ARE LOW

Con: A refinance isn’t free.

For most borrowers, the biggest drawback to a refinance is paying for the refinance. Since a refinance means a new loan, you’ll likely have to pay many of the same fees you did when you purchased your home, including an application fee, loan origination fee, and title insurance. You may even cover the cost of an updated appraisal.

Expect to pay between two and six percent of the total amount borrowed.

When it might make sense for you:

Refinancing your home may make sense for you if you can recover the cost of your refinance within a few years. Ideally, only consider a refinance if your interest rate will drop a full percentage point or more to ensure your savings outweigh the cost of your loan refinance within five years. If you are considering a loan refinance, compare several options to get the best terms.

Loan modification

Loan modification allows you to change the conditions of your original loan. Your original lender must agree to the new terms. A loan modification could change your loan repayment terms, reduce your interest rate, change the structure of your loan, or reduce the amount of money you owe.

Pro: You can get significantly better terms on your current loan.

A loan modification allows the borrower to reduce their interest rate, convert to a fixed-rate loan, increase the repayment period, and/or reduce the balance owed on the home. Since you won’t be getting a new loan, you don’t have to worry about closing costs or loan origination fees. If you are at risk of losing your home, a loan modification could allow you to keep the property. Keep in mind that a loan modification will not stop foreclosure proceedings.

Con: A lender will likely only grant a loan modification under extreme circumstances.

Lenders will likely only consider applicants who are at a high risk of facing foreclosure. Typically, a loan modification helps both the lender and the borrower avoid the expense and hassle of foreclosure. While a loan modification is usually free, it’s time-consuming, and a lender could foreclose on a property before they decide about the loan modification.

HOW TO GET THE BEST MORTGAGE REFINANCE RATES

Note: The CARES Act provides some guidance on loosening modification qualifications. Your financial hardship must be related to COVID-19, and loans may not be more than 30 days past due to qualify for the CARES Act loan modification.

When it might make sense for you: 

A loan modification might make sense for you if you are having trouble paying your mortgage, and you want to avoid a foreclosure. Additionally, if you owe more on your home than it’s worth, a loan modification could save you money.

Many people are facing financial difficulties right now. If you are concerned about losing your home or you’d like to take advantage of lower interest rates, now is the time to look into your options.