Loan Modification VS Refinance: Which One is Right for You?

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Owning one or many properties is a significant investment, and for many real estate investors and homeowners, a mortgage or loan is a necessary means to achieve that goal. However, job loss, financial difficulty, and other unforeseen events can cause a real estate investor or homeowner to struggle with loan payments. When this happens, many turn to a loan modification or refinance as options to help them stay afloat.

Loan modification and refinance are two financial tools that real estate investors can use to help them manage their loan payments. Both options can lower their monthly payment and reduce the overall amount they owe on their loan. However, loan modification and refinance are distinct strategies requiring different approaches and considerations.

In this blog article, we will take a closer look at loan modification and refinance, their key differences, and the pros and cons of each option.


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Table Of Content:

  1. What Is Loan Modification?
  2. What Is Refinance?


What Is Loan Modification?

A loan modification is a process that allows real estate investors to modify the terms of their existing loans. This can include:

  • Lowering the interest rate
  • Extending the loan term
  • Reducing the monthly payments. 

The main goal of loan modification is to make the loan more affordable for the borrower while still allowing them to keep their property. For real estate investors, loan modification can be a valuable tool to help them avoid foreclosure, manage cash flow, and maintain their investments. 

While the loan modification process can be complex and time-consuming, it can provide investors with the financial relief they need to continue building their businesses. As with any financial decision, it is important for investors to carefully consider the pros and cons of loan modification before proceeding.

Real estate investors looking to pursue loan modification should engage the services of an experienced attorney or financial expert to guide them through the process and maximize their chances of success.


Pros of Loan Modification

  • It can help borrowers struggling to make their loan payments keep their real estate investment properties. By reducing the monthly payment, a loan modification can make the loan more manageable and affordable and can help prevent foreclosure. Also, for regular homeowners, a loan modification allows them to stay in their homes and avoid the financial and emotional stress of losing their property.
  • It can improve a real estate investor’s credit score. When borrowers struggle to make loan payments, their credit score can be negatively impacted. Loan modification can help improve the borrower’s credit score by making the loan more affordable and reducing the risk of default.


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Cons of Loan Modification

  • It can be a lengthy and complex process. Loan modification requires extensive documentation, and the lender must review the borrower’s financial situation to determine if they qualify for modification. This can be time-consuming, and there is no guarantee that the borrower will be approved for loan modification.
  • It may only sometimes result in significant savings. While loan modification can reduce the monthly payment, it may not reduce the overall amount owed on the loan or mortgage. This means that the real estate investor may end up paying more in interest over the life of the loan.


When Should You Apply For A Loan Modification?

  • Being underwater on your loan: it means that you owe more on your loan than the property or asset is worth. This can occur when property values decline or when too much is borrowed against the property. 
  • You’re behind on your monthly payments: If you are not current on your monthly payments, refinancing an underwater loan may not be a viable option. However, you can opt for a loan modification if six consecutive on-time payments are made before applying for the refinance. 


What Is Refinance?

Refinance is when a real estate investor replaces their existing loan with a new loan with more favorable terms. The goal of refinancing is to:

  • Lower the interest rate
  • Reduce the monthly payment
  • Potentially shorten the repayment term
  • Change the type of loan if possible. 

Refinance is often pursued when interest rates are low and a borrower wants to take advantage of lower rates to save money on their loan.


Pros of Refinance

  • It can help borrowers save money on their loans. By securing a lower interest rate, borrowers can reduce their monthly payments and potentially save thousands of dollars over the life of the loan. 
  • Refinance can also help borrowers pay off their mortgage faster by shortening the repayment term.
  • It can help borrowers access their property’s equity. Borrowers can use the equity in their property to fund renovations, pay off high-interest debt, or finance other expenses. 


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Cons of Refinance

  • It can be costly. Refinancing requires closing costs, which can be thousands of dollars. These costs can offset the savings that a homeowner may achieve through a lower interest rate or a shorter repayment term.
  • It resets the clock on the borrower’s loan. When a real estate investor refinances, they are essentially starting over with a new loan. This means that the investor will have to make payments for a longer period, which may not be beneficial for their real estate goals.


When Should You Refinance?

  • You are not underwater on your loan: if you want to make your loan payments more manageable and haven’t missed any payment yet, you can refinance. Refinancing can help you with your next real estate investment strategies or if there are difficulties on the horizon.
  • You want to take out cash: With enough home equity, you can get a cash-out refinance to cover outside bills.


Refinance VS Loan Modification. Which one to choose?

Choosing between a loan modification and refinance will depend on your unique financial situation and goals. If you struggle to make your mortgage payments and are at risk of foreclosure, a loan modification may be the best option. 

On the other hand, if you are looking to save money on your loan or access your property’s equity, refinance may be the better option. Refinance can help you secure a lower interest rate, reduce your monthly payment, and potentially shorten the repayment term. However, weighing the costs of refinancing against the potential savings is important.

Before deciding, it’s important to consult with a financial advisor or a mortgage professional who can help you evaluate your options and determine the best course of action.



Loan modification and refinance are two financial tools that real estate investors and homeowners can use to manage their loan payments. While both options can help reduce monthly payments and make the mortgage more affordable, they require different approaches and considerations.

A loan modification is best for borrowers struggling to make their loan payments and at risk of foreclosure. Refinance is best for borrowers who want to save money on their mortgage or access their property equity.

Deciding between loan modification and refinance will ultimately depend on your financial situation and goals. It’s important to carefully evaluate your options and consult with a financial professional before making a decision. Talk to our expert team at REI News to discover financing opportunities that meet your specific requirements with reliable and affordable lenders.


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