Wenatchee Real Estate: Q & A

Question:  What is the difference between a mortgage "re-finance" and a "loan modification".

Answer:
A "refinance" is creating a completely new loan, and paying off the current loan.  It is, essentially, just like getting the original loan.  You have to go through the same process.   This is most often done when interest rates decline and/or the  loan amount falls below 80% of the property value.  When the loan is higher than 80% of the value, it is necessary to pay "mortgage insurance", which is an additional cost you don't need to pay as the loan amount declines and the value increases.  This is called "loan-to-value" ratio.  The major drawback of a refinance is the "refinancing fees".  Be careful that the refinancing fees don't outweigh the benefits of refinancing the mortgage.  It can add thousands of dollars on to the loan balance, even if the payments are less.

A "loan modification" is rewiting the terms of your current loan.  A lender may consider this option if your financial situation has changed and the mortgage payment is now creating a financial "hardship".  The "hardship" factor is the key to a "loan modification", and must be documented.   Factors such as a job loss or medical bills may be causing a financial hardship.  In a loan modification, the lender may reduce the interest rate and/or increase the amount of time allowed to repay.

It is always helpful to talk to a professional loan specialist or housing counselor in order to get all the most current information and determine the best option for each individual situation.  

Next up:  What is a "reverse mortgage"?

Best Regards,
Erin Davidson
Wenatchee Real Estate Agent

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