If I am trying to decrease my monthly payments, am I better off telling my mortgage lender that I want to refinance or that I want a loan modification?
Or is there any functional difference?
My understanding is a refinance is a new loan which replaces the old entirely, even if the lender remains the same. So you could refinance with a different lender on more favourable terms (but you’ll probably have to pay a break fee to your exisitng lender for paying off your loan earlier). A loan modification is a change to an existing loan such as extending the loan term, and thus has to be with your exisiting lender.
I think a refinance would have to go through credit control at the lender again, whereas a loan mod might not (possibly making a modification an easier process to get), but I’m not 100% on that.
A refinance cancels the existing loan and begins a new one. A loan modification just alters the terms of an existing loan.
If your intention is just to lower payments, try for a loan modification. Many banks won’t do it, but it should be less of a hassle than a new loan.
With a new loan, you always run the risk of failing to qualify or having some nonsensical, new regulation thrust in your face, possibly costing you money or cancelling the loan entirely. It’s less likely the lending institution will re-examine your status from scratch if all they are doing is changing some parameter.
Prepayment penalties aren’t that common in the US. Not unheard of, but much less common that they used to be. Supposedly some subprime mortgages slap that on, on top of all the other crap.
We’ve refinanced numerous times and never paid anything like that. Though with the new mortgage, there are a lot of upfront fees involved.
A modification is pretty hard to come by, from what I understand. It’s targeted at people who are in some sort of financial risk, or the house is underwater, or whatever. Basically if you can refinance (sufficient equity, income, etc.) you aren’t likely to qualify for a modification. If you can’t refinance, the banks are supposed to try to work on a modification but there are a lot of horror stories about them not doing their part.
It’s also possible there might be tax implicatins of a modification - if it involves forgiving some of the principal perhaps. Just guessing there, however.