You may wish to change the terms of a loan before the loan has expired. You will generally have two ways in which you can do this. You can either modify the mortgage by writing up an addendum to the current contract with your lender, or you can refinance the loan, meaning that the loan will be replaced with an entirely new one. This second practice has several advantages.
Modifying a Loan
When a loan is modified, it simply means that the terms of the loan are changed. The person to whom the borrower must make payments remains the same. However, the two parties will agree to sign an additional contract that will change how the money is paid, the rate of interest charged on it or some other term. To modify a loan, both parties must agree to the changes.
Refinancing
When a loan is refinanced, it means that a lender pays off the remaining balance of a borrower's current loan and then gives the borrower another replacement loan, one with somewhat different terms. Unlike with mortgage modification, a borrower can refinance a loan without consulting with his current lender. A refinanced loan can be offered by a lender other than the one to whom the borrower is currently making payments.
Don't Need Lender's Permission
One of the main advantages of refinancing is that the terms that you are able to get do not need to be agreed to by the current lender. Sometimes, when people are unable to refinance, they are forced to modify their mortgage. When a mortgage is modified, you only can receive terms that your current lender agrees to, which may be far less favorable than the lending market is offering.
More Options
Another advantage to refinancing is that you can receive offers for a large number of competing lenders, not just your current lender. Just as if you are taking out a new loan, you are allowed to approach a variety of lenders and take the offer of the lender with the most favorable terms.
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