Trouble with your loan payments can cause severe financial and emotional stress. Rather than let the problem escalate to the point where you lose your house, contact your bank to discuss options. Two scenarios are usually available: refinance or restructure. You can refinance if you have good credit and the means to repay. If you have already become delinquent, a restructure of loan terms may be your only option.
A refinance replaces your existing loan with a new one. You refinance to get more favorable terms, such as a lower interest rate or additional money for expenses like improvements or debt consolidation. To refinance, you must qualify for the new loan. First steps involve providing an application and financial information to the lender, who compares your debt with your income to ensure you can afford the new payments. The loan company will also appraise the collateral, the security for the loan, to make sure the value is sufficient to cover the new loan. The most common collateral is real estate, but lenders also accept cash, automobiles and marketable securities.
Refinancing has a number of benefits. A straight refinance with no cash out will give you a lower rate and payment, which will save you money each month. If you refinance with cash out, you won't necessarily get a lower payment, but you'll have extra money for your needs. If you refinance because you're struggling, you'll improve your financial situation and keep your credit from suffering. The bank benefits from the fees it collects during the application process.
A restructure, sometimes referred to as a troubled debt restructure or TDR, involves modifying the terms of your existing loan. This occurs when a borrower’s financial situation makes it impossible to repay the loan in its current form. A modification is considered a TDR if you are currently experiencing financial hardship and the lender makes a concession such as forgiving a portion of principal or interest. The lender may also institute a forbearance agreement as part of the restructure. In this temporary agreement, you make minimum payments for a period of time set by the lender. The lender does this to give you time to improve your financial situation.
A restructure is beneficial to both the bank and the borrower. Restructuring a bad loan gives you relief and at least delays the foreclosure process. Banks often lose money during a foreclosure due to legal expenses. Even though it takes possession of the property, it is sometimes more cost effective to work with you on a restructure as opposed to incurring the expense of the foreclosure process.