Refinancing Vs. Loan Modification: Which is Better for Lenders?

Before foreclosing on a property, a lender might consider alternative resolution to resolve borrowing delinquency. A lender might decide to either modify or refinance the loan. Both processes are similar, but usually address different issues or needs a borrower might have. Total Lender Solutions is here to act as an extension of your team to help navigate the best route for lenders.

Refinancing Versus Loan Modification: What’s the Difference?

Refinancing is technically loan modification. However, lenders use the words differently when referring to different situations.

Loan modification addresses borrowers who struggle to make payments and may not be able to solve that delinquency in the short term. Typically, borrowers struggle because the monthly payment is too high. Loan modification restructures the terms of the loan — this usually involves lower payments with an extended repayment term, or it may be a renegotiation of the interest rate.

Refinancing also modifies the terms of the loan, usually either with a new term length, interest rate, or additional benefits for the borrower. Refinancing, however, is typically used by borrowers current on their payments. The borrower goes to a new lender and lets a lender buy their mortgage. In turn, the lender agrees to give the borrower better repayment terms. In this transaction, borrowers have the power, and a lender may consider offering their borrower better repayment terms to keep them from refinancing with another lender. It will be extremely difficult for a borrower to refinance their mortgage if they are in default.

Is Refinancing or Loan Modification Better for Lenders?

If a borrower is in default, it will typically be less expensive and less time consuming for a lender to try to resolve that default before initiating the foreclosure process. If a lender can resolve the delinquency through loan modification and the borrower gets out of default, this is an ideal solution for both borrowers and lenders.

Refinancing is a complex topic for both borrowers and lenders, and can be detrimental or beneficial to lenders depending on how the loan is refinanced or how the mortgage is serviced.

Keep Your Team Educated About Foreclosure Law

At Total Lender Solutions, we advocate for lenders looking to maximize recoveries on defaulted loans. For over 15 years, our team of highly experienced real estate professionals and legal experts has transformed complicated processes into clear resolutions for institutional and private lenders. We work as a vigorous extension of your team to provide comprehensive solutions and seamless communication, from pre-foreclosure and notice of default to the final sale phase. Our dedication and persistence when it comes to the foreclosure process ensures that our clients feel confident in reaching a successful outcome. Contact us today.