Loan Modification vs. Refinancing

Home loan modifications are often confused with home loan refinancing, but they are very different transactions that involve very different fees. Both can accomplish the same goal, but you should know the differences before making any decisions about your loan.

A loan modification, or loan enhancement as it is sometimes called, is where you and your lender agree to change one or more terms of your home loan. The results can vary based on programs offered by lenders and can include:

• Changing interest rates
• Fixing interest rates or payments for longer periods
• Lowering monthly payments
• Changing principal balance
• Extending the repayment period
• Extending interest only periods
• Rolling past due amounts into a new monthly payment

In a modification, the lender will detail the changes it proposes in a modification agreement. This agreement is a legally binding document that becomes part of your loan and is as enforceable as your original loan. Modifications are typically completed within a week. Loan modifications are used for borrowers who are experiencing payment difficulty as well as for borrowers who pay on-time.

A refinance is where you create a new loan, either with your existing lender or a new one of your choosing. The terms of the loan may be vastly different from your old loan. As part of granting a new loan, the lender reviews your credit background (credit report), considers your ability to repay the loan (your income and expenses), and estimates the current market value of your property (an appraisal). Refinances can take up to a month to complete.

Costs differences for a refinance versus a modification

Because of the greater complexity involved for a lender in a refinance decision, borrowers will typically pay higher fees than they would for a loan modification. How much is the difference? Take a look at this chart:

Closing costs on a refinance can be between 2% and 3% of the amount you are financing however in both a modification as well as a refinance, lenders typically roll the fees into your mortgage balance so you do not have to pay for it out of pocket.

Depending on your situation, either method may be right for you. At PennyMac, we offer no cost modification programs as well as no or low-cost refinance programs to qualifying borrowers. One big reason to choose PennyMac for your home financing needs. Contact one of our Loan Specialists to find out if you qualify.