Have you been having difficulties with your mortgage payments? Turns out, you are not alone. According to recent statistics, the mortgage delinquency rate in the U.S. has increased up to 8.22% last year. To give you a point of comparison, the mortgage delinquency rate before the global health crisis is only up to 3.77%.
Fortunately, there are various methods to manage your finances, and maybe even permanently reduce mortgage payments. For us, there are two ways that are particularly effective: mortgage loan modification and refinancing.
In this article, we are going to talk about both of these options and hopefully help you determine which of them is the smarter choice for you.
What Is a Loan Modification?
A loan mortgage loan modification (sometimes also referred to as home loans modification) is the application of changes to the original terms of your mortgage loan.
The objective is to determine the conditions that can be improved so that you can better settle your home loans and adjust them accordingly.
As such, you will need to work together with your current lender. You will also need their consent.
Here are just some of the terms that you can get adjusted:
- Loan Term. One of the most common home loans modification is applied to the loan term. This is ideal if you’re having difficulties making your monthly payments. After all, making your loan term longer will also make the monthly dues smaller.
- Interest Rate. If you have found that the current interest rates being provided by your lender have significantly decreased compared to when you have signed your contract, then there might be a way to modify it and decrease yours as well. Doing so can also potentially lower your monthly dues.
- Loan Structure. This is an option for those who want to switch from an adjustable interest structure to a fixed-rate one and vice versa. This is usually recommended for those who have recently experienced changes in their mode of employment.
- Principal Forbearance. This is done by setting aside a part of your principal balance to be paid at a later date. This type of modification is rarely done but can still prove beneficial to avoid an imminent foreclosure.
How Can You Modify Your Loan?
Please keep in mind that modifying your loan may negatively impact your credit score. However, if you’re sure that you want to try this method, then you will need to get certain documents ready. The first requirement is usually your proof of income. This will serve as evidence that your income is not enough to cover the rate of your current mortgage.
You will also need your most recent tax return as well as bank statements to have a better insight into your current financial state.
Finally, you will need to write a hardship letter that will state the reasons why you can’t pay your monthly payments any longer (or even your entire loan, for that matter).
Reasons for Loan Modification
Applying for a loan modification is a great idea if you are having difficulties making your monthly payments. It is also a wise decision if you think that you already owe more than what your property is worth.
For others, they believe that a loan modification can help avoid foreclosure and sell their home after the process. Here’s the deal: even if you are granted a loan modification, it still doesn’t mean that you should continue living in a property if it doesn’t make sense to you anymore. Maybe your job requires you to relocate? Or do you simply want to downsize now that the kids are in college?
Regardless of your reasons, it is possible to sell your home easily and stress-free. Feel free to contact us so we can further answer your questions such as what to expect during the foreclosure process?
What Is Mortgage Refinancing?
Meanwhile, let us move on to talk about mortgage refinancing. It is the method of replacing your existing loan with a new one. You’re not just modifying your contract like earlier. This time you are completely renewing everything.
Doing so can change the term of your mortgage, completely recalculate interest rates, and even change your loan type.
How to Refinance Your Loan?
The process of refinancing your mortgage is closely similar to applying for a new loan. First, you will need to find a lender, go through their application process, and submit the needed financial documentation for underwriting.
Most lenders would also require an appraisal of your property. After all, your lender wants to make sure that they are not letting you borrow more than what your house is actually worth.
Then, once these steps are complete, your lender will provide you with a Closing Disclosure. It is a document that will contain all the important details of your loan along with the closing costs. They will then conduct a closing meeting with you where you will be able to sign your new contract.
How to Decide Between Loan Modification and Refinancing?
The answer will highly depend on your personal reasons and current financial state. A loan modification is usually undertaken by people who are significantly behind their mortgage dues. Meanwhile, those who apply for refinancing are generally in good financial shape and are more than capable of covering the closing costs.
Those who are planning to sell their property will be pleased to know that it is possible to sell after a loan modification or refinance. Just be sure to check your terms and see if there’s an owner-occupancy clause in your contract as this will require you to stay in your property for a certain amount of time before you will be able to sell or rent it out.
Final Thoughts
The bottom line is, there are multiple options that can help you avoid foreclosure and losing the property you’ve worked so hard for. Loan modification and refinancing are just two of your available options. You may also consult with your lender if there are other methods that you can explore. Good luck!
