Mortgage relief options: refinancing or loan modification


The contagion of the coronavirus has shaken the American mortgage market. In the first phase of the pandemic, mortgage rates plunged to record highs, triggering a refinancing boom for homeowners who were in good financial health.

Smiling couple standing in the kitchen doorway at home

© Thomas Barwick / Getty Images
Smiling couple standing in the doorway of the kitchen at home

The next phase of the post-pandemic mortgage market is looming on the horizon. In the spring of 2020, lenders gave generous breaks to borrowers who couldn’t repay their loans. But at the end of these forbearance periods, some homeowners who have yet to recover financially still need mortgage payment relief they can’t afford. Over a million homeowners may be able to ask their lenders for loan modifications.


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The bad news? Negotiating a loan modification can be frustrating. Requirements vary depending on the type of loan, and lenders will inundate you with paperwork and unfamiliar jargon. Here’s everything you need to know about these options.

Loan modification vs refinancing

Both a loan modification and a mortgage refinance have the same goal: to save you money by lowering your monthly payments. However, when it comes to which option you should choose, keep in mind that these two tactics are quite different.

Refinancing is something you choose to do – if you don’t refinance, the consequences are minor. You might miss out on some savings, but you won’t lose your home. A modification, on the other hand, is something borrowers are obligated to do. Without a loan mod, default and foreclosure looms in the not-so-distant future.

To be eligible for a loan modification, you will need to be behind on your payments and you will likely be asked to document an economic hardship. To be eligible for refinancing, you will need to be up to date on your mortgage payments and prove that you are making enough money to absorb the new payments.

Main differences
Loan modification
  • Available to borrowers in difficulty
  • You keep the same lender
  • You maintain the existing loan, but with new conditions
  • The process can be confusing and difficult to navigate
  • Must prove difficulty or be late on payments
  • Available for borrowers in a strong financial position
  • You can change lender or stay with your current lender
  • You pay off the old loan and start a new one
  • Easy to secure for eligible borrowers
  • Must prove solvency

When loan changes make sense

If you’ve gotten through the coronavirus recession without touching your income and have been able to stay up to date on your mortgage payments, don’t bother with a loan modification.

However, if you’re one of the large group of Americans who lost their jobs and haven’t recovered yet, a change might make sense. While mortgage forbearance offered generous terms to unemployed homeowners, those forbearance periods are ending – and lenders expect homeowners to resume their payments. If your finances are still not back to pre-pandemic levels, you may want to modify your mortgage.

A loan modification changes the terms of the loan so that borrowers facing economic hardship can afford the payments. To achieve this goal, lenders can reduce the interest rate, extend the term, or change the type of loan (or combine all three). Some possibilities:

  • Longer loan term: If your monthly payment is too high for your post-pandemic budget, your lender could extend your term – from 15 years to 30 years, or from 30 years to 40 years. This gives you more time to pay off your loan and reduces your monthly payment amount.
  • Lower interest rate: If interest rates are lower now than when you locked in your mortgage, you may be able to modify your loan and get a lower rate. This step decreases your monthly payment.
  • Another type of loan: Maybe your original loan was an adjustable rate mortgage. The modification could bring this loan down to a fixed rate.

The modifications are attractive to distressed borrowers because they do not require a high credit score or proof of income. This tactic is designed to keep borrowers out of foreclosure.

A significant difference between a loan modification and a refinance loan is that a modification adjusts your current loan. Refinancing, on the other hand, replaces your existing loan with a new one. Plus, loan modifications come with a modest fee, usually a small administration fee. A refi is a new loan, so it comes with high closing costs.

Usually, loan modifications provide immediate mortgage relief, while refinancing can take 30 days or more. Borrowers cannot access cash through loan modifications (such as in withdrawal refinancing), but a loan modification does not prevent homeowners from selling their homes.

One downside: A loan modification may show up on your credit report as a negative item. However, it is better to have a loan modification on your report than a foreclosure or missed payments.

Advantages and disadvantages of modifying your loan


  • Lower monthly payments
  • Avoid default and foreclosure
  • Keep the same loan, with new conditions

The inconvenients

  • Must show difficulty
  • Your credit score could take a hit
  • Negotiating with lenders can be a tedious process

How to modify your loan

Video: Mortgage rates rise, demand for refinancing falls (CNBC)

Mortgage rates rise, demand for refinancing falls

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Each lender has their own rules and requirements for loan modifications. Most require you to provide documentation, including a hardship letter, bank statements, tax returns, and proof of income.

If you’re having trouble making your payments and think you qualify for a change, contact your lender and ask them how to apply. Lenders are not required to accept your request, and your lender may reject your request. In this case, you might still be eligible for refinancing.

When refinancing makes sense

If you’re one of the lucky homeowners who have maintained their income and credit rating during the pandemic, refinancing might make sense.

The classic reason for refi is to lower your mortgage rate. In the months following the onset of the pandemic, mortgage rates plunged to historic lows – and refinancing volumes soared. Qualified borrowers could get 30-year mortgages at less than 3%. Since hitting a record low in January, mortgage rates have risen slightly.

However, rates still remain low compared to historical levels. If you haven’t refinanced in the past two years, it makes sense to review your current loan.

Here are some reasons why it may be a good idea to refinance:

You still haven’t locked in a historically low rate. Rates remain well below their pre-pandemic levels. Suppose you took out a 30-year loan at the end of 2018 at 4.75% (sounds hard to believe, but that was the going rate at the time). Your monthly payment for principal and interest is $ 1,565. If you refinance at 3.25%, you will reduce your monthly payment to $ 1,306, saving $ 259 per month. Your situation may not generate such dramatic savings, so be sure to calculate your breakeven point – the period of time you will need to offset closing costs with lower monthly payments.

You renovate your house. Whether it’s time to update your kitchen, improve your bathrooms, or upgrade your home in some other way, mortgage money is the cheapest financing available. A cash refinance allows you to tap into the equity in your home to pay for construction. This makes more sense if you have a lot of equity and the renovations will increase the resale value of your home.

You have an FHA loan. Borrowers who have taken out loans from the Federal Housing Administration may be particularly good candidates for refinancing. This is because FHA loans include high mortgage insurance premiums that do not go away during the life of the loan. The mortgage insurance premium on an FHA loan is 0.85% per annum. So on a $ 300,000 loan, that’s $ 2,550, or $ 212.50 per month. Eliminating these monthly fees could make refinancing a conventional loan without mortgage insurance a good decision.

Advantages and disadvantages of refinancing


  • Lower monthly rate
  • You can withdraw money You can change the conditions

The inconvenients

  • You will need strong credit and income
  • Closing costs are high
  • You’ll reset your debt clock

How to refinance your loan

Refinancing is basically buying a new loan. Contact multiple lenders – comparing three or more offers can save you thousands of dollars over the life of your loan.

When you find an offer you like, you’ll need to provide the same documents you submitted when you took out the initial loan: bank statements, pay stubs, and tax returns. You may need an appraisal and you will need to pay for title insurance. The process can take up to two months.


How can refinancing or loan modification affect debt?

Usually, both options extend the length of time it will take you to pay off your debt. Changes often lengthen the term of your loan. If you refinance from a 30 year loan to a 30 year loan, you are resetting the payment clock. But if you’d rather reduce your outstanding debt, you may want to consider refinancing a 30-year loan with a 15- or 20-year term.

Will modifying a loan hurt my credit?

Yes, changing your mortgage can hurt your credit rating. However, the blow is less severe than if you continue to miss payments and end up defaulting.

What loan modification programs are available?

The Great Recession brought a soup to the alphabet of loan programs, including HARP and HAMP. These programs have expired. But there are others, including Fannie Mae Flex Modification, Freddie Mac Flex Modification, and the Freddie Mac Enhanced Relief Refinance Program.

Learn more:

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