A lot of people confuse refinancing with loan modification and vice versa. Althought the two are similar, there are also disctincy differences.

A refinance is when you decide you want better terms on your loan or you want to take some equity out of your home (cash out) so you decide to refinance. Refinancing is fairly common but in order to qualify to refinance your loan, you need perfect credit (opposite of LM) and you need to have equity in your home (your loan should be a minimum of 80% of the value of your home to get a decent interest rate) which is also opposite of loan modifications.

Due to the poor economy, refinancing is very difficult because banks are losing money from people who cannot pay on their loan. However, people can still refinance. As I’ve mentioned, they just need to have perfect credit, equity in their home, a full time job, assets; Also, when looking to refinance, you can have a mortgage professional research what is the best rate and payment available for you by seeing what All of the banks are currently offering. Typically, you compare the best interest rate between 5-6 mortgage banks to see who has the best terms. The only downside to refinancing is that closing costs are usually about 3% of the loan amount (example 300,000 loan equals $7-9k in closing costs if you include taxes and insurance). Homeowners don’t have to pay the closing costs upfront because they just add them to the loan amount but this extends the length of time you will be paying your loan back and it increases the overall interest you pay to the bank over time.

A home loan modification is restructuring the loan for a homeowner Without having to go through the refinance process. LM’s save you thousands of dollars on closing costs BUT it can also be more difficult to qualify for a loan workout from your bank. The easiest home loan modification to complete is if a homeowner is late on their mortgage but they have a job and want to keep their home. Under these circumstances, the bank to whom the homeowner is currently paying their mortgage to will try to make the payment more affordable for the homeowner (lower rate or lower payment) so that the bank does not have to foreclose on their home.

A key difference between LM and refinance is that with LM, you can only get a lower rate or more affordable payment with your current bank. You cannot shop to see what bank has the best rate/payment when you are modifying your loan. The reason the bank of a homeowner would agree to modify your loan is to avoid additional late payments, late fees, or worse case take back the home through foreclosure which forces the bank to lose even more money. You can actually get a loan modification for low cost or even free (refinance really never free) but the process is very time consuming and requires knowledge of the process so most homeowners elect to have an outside company assist to see if they qualify.

Sometimes you can modify your loan if you are not late on your mortgage but there has to be circumstances which qualify you (no equity in home, reduced income, etc). You always have to detail a financial hardship to qualify for a home loan modification