UPDATED: Aug 3, 2021

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Written By: Sara RouthierReviewed By: Joel OhmanUPDATED: Aug 3, 2021Fact Checked

When homeowners go through financial hardship, they often look for ways to cut down on expenses.

For most people, their largest recurring monthly cost is their mortgage payment. Monthly mortgage loan payments can be massively expensive depending on the size and location of a borrower’s home.

Naturally, this is a prime area where people want to save money.

Fortunately for homeowners and mortgage loan borrowers, there are two ways to cut down their monthly payments. They can either refinance their homes or modify their mortgage.

A home refinance replaces a homeowner’s current mortgage with a new one, but under new terms and a new mortgage interest rate. Ideally, this is done to favor the homeowner and save them money typically by offering a lower interest rate than they had before. A new lender usually offers the refinance loan to the homeowner, thus replacing the previous lender. Click here to apply for a refinance quote for free.

A mortgage modification doesn’t replace a homeowner’s original loan, but rather changes its monthly payment amount and the terms. This may include switching from an adjustable-rate mortgage to a fixed-rate mortgage. The mortgage servicer does not change in the process.

Both mortgage refinancing and modifications will reduce borrower’s monthly payments, but that doesn’t mean they are the same. There are certain times when one should pursue the refinancing option and obtain a new home loan, while there are other times when one should stick with their current lender and modify their original mortgage loan.

Determining which one is right for you is the key, so we spoke to mortgage experts and asked them to shed some light on this issue.

Appraisals for Refinancing and Modifying

Gloria Shulman, Founder of the Centek Capital Group, told loans.org that loan modifications have one advantage that refinancing doesn’t. It doesn’t require an appraisal.

“With the oppressive regulations adopted by Fannie Mae and Freddie Mac in 2009, low-ball appraisals have blown up refinance applications or forced borrowers to come up with thousands of dollars at closing,” she said.

If a home is appraised for less than its worth, that home will be technically considered less valuable than it really is. This is a serious problem when homeowners are looking to sell their home or use its equity for getting some money. Since homes are usually the most expensive thing people own in their entire lives, and act as investments, having a home that is undervalued may mean a person makes low monthly payments in the short-term but loses out in the long-term.

But unfortunately following the Housing Crisis and the government’s push to be more cautious with appraisals going forward, room for error has emerged.

“New regulations adopted by Fannie Mae and Freddie Mac in 2009 have led to inexperienced appraisers estimating home values in areas where they have little experience,” said Shulman. “As a result, they typically use foreclosures and short sales as primary comparables. It’s important that borrowers be very proactive in providing appraisers with favorable comparables, and that information is usually available at their local county offices.”

Unfortunately for homeowners, compared to refinances, loan modifications are one-shot deals and borrowers must accept the terms that their lenders offer. Additionally, less reputable companies tend to charge ridiculous fees and Shulman warns that if a modification sounds too good to be true, then it probably is.

Right now though, she urges people to take advantage of today’s historically low interest rates to do a mortgage refinance, just so long as they meet the strict income requirements most lenders have.

“The key decision point on whether to pursue a refinance loan is your project time horizon in your home,” she said. “If you are looking to stay in the house for over 10 years and have a 30-year note at 6 percent, refinancing is a great idea. It also makes sense if you just got promoted at your job because banks will look very favorably on this when analyzing your household income.”

Mortgage loan borrowers who refinance or modify their home loans get to decide where to put the money they save. Typically, they put it towards a college savings account or to major purchases like a car. They can also use it to pay off debts, such as outstanding student loan debt.

Comparing modifying and refinancing, all things being equal, Shulman concluded that a refinance loan is always better than a modification, assuming a homeowner’s finances permit it.

Modifications on the other hand, are usually a last gambit for homeowners who are having difficulty making their payments. Lenders, who rely on monthly payments for profit, would certainly rather receive something instead of nothing from homeowners each month.

When homeowners are enduring financial hardship, the are simultaneously at the proper time for a modification and at the only time they should pursue a modification. However, that doesn’t mean they will qualify for it.

Modification Qualifications and Refinance Requirements

Jamie Cogburn, an attorney at Cogburn Law, said that most home loan modifications actually require the applicant to be delinquent on their mortgage payments.

“Also, you must be upside down for a modification to be possible, whereas most refinance programs are for people who have equity,” he said. “There is HARP, which allows you to refinance if you are upside down, but you must have Fannie Mae or Freddie Mac as your investor to qualify. If you don’t have either of these, then you can’t refinance.”

HARP is the federal government’s Home Affordable Refinance Program. It allows underwater homeowners to refinance their mortgages so that they pay the lowest possible interest rate.

Fortunately, homeowners don’t have to be in financial stress in order to qualify for HARP, but they will have to have had a mortgage guaranteed or owned by Fannie Mae or Freddie Mac. They also must not have missed any payments over the last six months and have a debt-to-income ratio over 80 percent.

Federal programs aside, at least one expert thinks that being able to get a refinance is something of a luxury.

Attorney Francine A. Gargano, has worked in real estate law for 30 years.

Having been in the industry for so long, she found that being able to refinance is a low-cost option that only a lucky few get to enjoy. The same cannot be said for people who pursue modifications.

“For home modifications, [borrowers] need to be behind on their mortgage and still have enough income,” she said. “I have found the loan modifications to be expensive to my clients in many ways.”

Gargano recounted how several of her clients had to stop paying their mortgage for months just to qualify for a modification. Doing so ruined their credit scores on account of the missed payments. Combined with interest, late fees and legal fees, it is clear that the cost of a modification can grow quickly.

Part of the cost also comes from the the large amount of paperwork involved in the process. This is one of the reasons that attorneys are practically a necessity for modifications. More worrisome are scams that claim to cut down on the lengthy process.

“Many people are scammed by the companies that advertise they can help with these modifications,” said Gargano.

Even if modification applicants avoid scammers, they may not get what they bargained for.

As a warning, she pointed out that sometimes a modification is so small it makes little to no difference in a borrower’s financial situation. When it comes to modifications that are adjustable, the rate can increase in the future, making the whole endeavor nearly pointless.

Greg Cook, a Specialist with the First Time Home Buyers Network, said that modifications are really only for people who are struggling to make their monthly mortgage payments.

In fact, homeowners have to prove they are under hardship if they want to modify their mortgage loan. Even worse is the fact that lenders are reporting modifications as a negative attribute to credit bureaus since, in essence, homeowners are not paying what they previously agreed to.

“A refinance, on the other hand, is for a homeowner who has made their payments on time and qualifies based on their income and credit,” he said. “Refinancing is always the better option, but if a homeowner can’t qualify then a loan mod may be their only option to keep them out of foreclosure.”

“Milking a Unicorn”

Nirav Desai, the Managing Principal at Qubera Wealth Management, said that homeowners should always choose a refinance over a modification since the process of getting a modification is akin to “milking a unicorn.”

“First you can’t find any unicorns,” he said, “Secondly, they don’t have milk teats.”

He elaborated on his colorful answer by explaining that the average homeowner has neither the patience or knowledge to get a loan modification. However, with refinances, lenders walk applicants through the process and generally decide whether to proceed with or deny an applicant within a 30-minute conversation.

Desai alleges that no one truly knows the rules of mortgage loan modifications. In his experience, banks will repeatedly ask for the same information over several months, leading to a frustrated experience for the homeowner.

“The only people I know who got loan modifications are people with jobs who would’ve qualified for a refinance anyways,” he said. “ I don’t know anyone who was in a tight spot and actually got approved for a loan that reduced their principal balances or interest rates.”

Even if modifications are appearing to be as elusive as the Holy Grail, trends are showing that they are less sought after than before.

Trends for Modifying and Refinancing

Anna Cuevas, Founder of Ask A Loan Mod Guru, said that most people who try to refinance or get a home loan modification live in one of five areas:

  • Los Angeles
  • Riverside-San Bernardino
  • Miami
  • New York
  • Chicago

Essentially, massive urban centers with high population densities.

Presently, she thinks that refinances have decreased since interest rates are rising. But modifications have also been on the decline since the peak of the Housing Crisis.

Even though demand for refinancing and modifications has begun to wane, perhaps people would have had an easier time getting the latter if they knew of its more specialized form.

Lori Beardslee, Branch Manager with Silverton Mortgage Specialists, said that homeowners should go with a modification so long as their lender is willing to do a “note” modification.

“What this means is they simply ‘modify’ the interest rate and monthly payments, but other terms of the loan remain the same,” she said.

She explained her logic with an example.

A homeowner paying 5.5 percent applies for a note modification that reduces the interest rate to 4.5 percent, which lowers the monthly payment. Even if the lender wants a new appraisal the risk is low and there is already a loan obligation in place.

“A true refinance is a whole new loan with all new terms, amortization, interest rate, and payments,” she said. “[But] a note modification would just modify your 30 year mortgage to a lower rate/payment, but does not re-amortize it.”

As far as costs go, Beardslee thinks that a full refinance is much more expensive than a note modification, but admits that not all lenders are willing to modify a note. After all, it is in lenders best interests to keep home loan borrowers at a higher interest rate and those lenders are not obligated to modify home loans.

While these home loan experts have certainly clashed with their advice, it can be surmised that most do favor refinancing home loans over modifying them. If borrowers qualify for a mortgage loan refinance, then by all means they should probably proceed. However, if they do not and are unable to pay their monthly mortgage payments, a modification to their current loan may be their final attempt at keeping their home. It is no doubt an attempt worth making for many homeowners and families.

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Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Written by Sara Routhier
Director of Outreach Sara Routhier

Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP® Joel Ohman