What is the Difference Between Loan Modification and Refinancing?

Instead of proceeding with the foreclosure action, most banks and lending institutions prefer to arrange a loan modification plan with the borrower. Thus, the terms of the loan will be changed and the borrower will be given a new chance to pay off the existing debt. When it comes to refinancing, there will be better loan terms as well but a number of fees and penalties to pay, which depend of course on the actual mortgage. This is one significant difference between loan modification and refinancing, but obviously not the only one.


Even though loan modification results in a lower interest rate, lenders have become interested in such programs given the worrying numbers of homeowners in default. They prefer to avoid default mortgages and to offer the borrower the opportunity to escape financial difficulties. Refinancing resembles loan modification in that it can guarantee a lower interest rate, but there are many differences one should be aware of. Homeowners are considered suitable candidates for refinancing the moment they have a high credit score, equity accumulated on the property and most importantly, a job that is 100% secure.

The recent economic recession has had a negative impact where home equity and loan balances are concerned, making it almost impossible for people to consider refinancing. People are losing their jobs and they have a hard time meeting monthly payments. For them, loan modification is a better option, not requiring the perfect credit score nor any of the things mentioned above. The terms of the loan will be changed by the lender, the monthly payments will become affordable and the interest rate will be reduced.

Is refinancing more advantageous than loan modification or vice-versa? The truth is that these two options are aimed at people in different situations, each presenting a set of advantages and disadvantages. Refinancing can be a better option for people who have equity accumulated on their property and who have no stains on their credit report. If you choose to refinance and you meet all the criteria, you should not necessarily expect to get a fixed interest rate or a reduction on your payments. As for loan modification, there are no fees to pay, your credit report is not taken into account and you can benefit from a lower, and fixed, interest rate. If you wanted to know the difference between loan modification and refinancing, I believe you have found the answer to that question!