Mortgage Modification or Refinance?
April 23, 2009, Revised August 27, 2009

In general, borrowers should seek a refinance rather than a modification if they can refinance at a significantly lower rate at a reasonable cost. Whether or not you can refinance profitably depends on the rate you are paying now relative to the rate you can get in today’s market, and what it would cost you to get it.

For example, if you had to refinance as of April 22, 2009, assuming your existing rate is 5.5%, you would be able to beat it only if you are a “creampuff borrower”, meaning a borrower who qualifies for the very best deal available in the current market. Because of the financial crisis, the creampuff definition has become increasingly restrictive. You need to have a loan balance of $417,000 or less secured by a single-family house in which you reside, have a credit score above 740, have equity in your property of 20% or more, and be able to document adequate income. Of course, you must be current on your payments.

If the market remains the same but your current rate is 6.5% rather than 5.5%, you might fall short on one or two of the specs above, and still find a refinance profitable. See Who Gets to Refinance in a Stressed Market? To determine whether a refinance will be profitable for you, use my calculator 3a, (Mortgage Refinance Calculator: Refinancing One Mortgage).

If your equity in the property is less than 10% (meaning that the loan balance exceeds 90% of current property value), a market-based refinance will require mortgage insurance, which in many if not most cases, will make the price of a new loan too high to help. However, if you meet the other specs and your loan is owned by either Fannie Mae or Freddie Mac, you will probably qualify for a special refinance program that allows loan balances up to 125% of property value.

To qualify for this program, you must meet conventional underwriting requirements, your existing payments must be current, you cannot have more than one 30-day late payment in the previous 12 months, and your documented income must be sufficient to cover the new payments. See The Administration’s Plan to Help Troubled Borrowers.

If you don't qualify for a refinance that will help, go to The A, B, Cs of Getting Your Mortgage Modified.

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