The main reason why you should do a loan modification instead of a refinance is fees, fees, fees, and a couple more fees. When you do a refinance every time without fail you will be adding thousands of dollars on to the balance of your mortgage. Separate fees for a refinance will be charged by the loan officer, escrow agent, lender, county recorder, notary, and possibly up front mortgage insurance premiums for your new FHA or VA loan. These FHA and VA loans are becoming very popular as equity dries up because borrowers can get a loan for the highest amount relative to the appraised value of their home. The current upfront FHA mortgage insurance premium is 2.25% of your new loan amount. That equals to $4,500 on a $200,000 mortgage and that is only one expense. Let’s not forget about the monthly mortgage insurance premium that FHA charges of $83.33 paid monthly for five years on that same $200,000 mortgage. The VA funding fee is slightly higher at 2.75% of the loan amount for a first time VA benefit user and the 2nd time user of VA benefits will be charged 3.75% of the new loan amount. 3.75% of a $200,000 mortgage is an upfront fee paid by the borrower of $7,500. Uncle Sam’s really corn-holing the Veterans!
Now we will take a look at what the fees are on a loan modification. The fees for a loan modification are free if you choose to do the loan mod yourself. The one fee that you might have when doing a loan modification would be for notarizing your final loan modification documents. I took my final loan modification documents to my local Wells Fargo bank and they were able to notarize the documents at no charge since I have a checking account there. Your lender can also cancel late fees owed to them when you do a modification and add any late mortgage payments onto the balance of your newly modified loan.
If you choose to use an attorney or one of those loan modification companies for your loan mod, then what they charge will be the only expense for your loan modification. They typically will charge an upfront fee of $500 or more and will charge an additional larger fee once the loan is modified which could be as much as $4,000. Be wary of any company that charges a high fee upfront, there have been many cases of fraud in the mortgage modifying business. I have heard more cases of fraud then I have success stories in regards to loan modifications. It’s sad, but it’s a reality.
In conclusion, when deciding between a loan modification or a refinance, you should always try to modify your current mortgage to save on fees and you can get a 2% interest rate which you will never get with a refinance.
This article is the third of a Do-It-Yourself approach to home loan modifications. Check back often or subscribe to this site to stay tuned for the next article in this series (a new post will come out each week day for a month), designed to help you complete a loan modification on your own, cutting out the middle man, helping you protect your ability to stay in your home for the best price possible, and helping you lower your payments as much as possible. After all, nobody will look out for you as well as you can look out for yourself.