Foreclosures really are a last resort for both lenders and borrowers. Most lenders would prefer to resolve the situation long before it comes to a foreclosure. Most recently, the loan modification method has been preferred, whereby more affordable terms on the loan are negotiated and agreed upon by both parties. Similarly with refinancing, improved loan terms ore negotiated and settled on. However, one fundamental difference between the two is that when you refinance, you will also incur penalties and fees dependent on the size of the mortgage itself. This is not the case with mortgage modification and this is the first way in which these two options differ.
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Despite the fact that loan modification invariably has reduces the interest rate that the lender receives from the borrower, lenders are still fully encouraging their borrowers into such plans. Where the alternative is defaulting on the loan, it is in the lender's interest to assist homeowners with their financial challenges. Refinancing is similar to loan modification insofar as that this also lowers the rate of interest, however there are key differences between the two. Homeowners are considered eligible for refinancing only when they have good credit. With accumulating equity on a property and with employment security, it is most likely that their credit will be sufficiently high.
The incredibly tough economic climate we face at the moment has led to massively increased unemployment. With so many losing jobs and finding themselves unable to meet their monthly financial commitments, loan modification is proving a much better option than refinancing for many, largely owing to the fact that loan modification eligibility does not depend on a perfect credit score, yet still adjusts the terms of the loan, lowers the interest rate and makes the monthly mortgage payment affordable to the homeowner.
Now comes the question of which is the better option of loan modification and refinancing. The fact of the matter is that both of these plans are tailored for individuals in different circumstances and offer benefits and detriments. For those who already have some equity built up in their home and who have a near perfect credit report, though this plan in no way guarantees a lower interest rate. For those who do not have a gleaming credit history and who maybe do not have substantial equity built up in their home, mortgage modification loan offers a way to reduce interest and monthly payments without taking these factors into consideration. And, of course, with no up front fees and penalties to pay on loan modification, that's another significant difference.
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