What is the difference between refinancing and loan modification?

Refinancing is the process of taking out a new loan in order to pay off one or several existing loans and debts. Loan modification is a change to a single loan, often to make repayments more affordable.

Depending on the details of a loan modification it may be treated as a continuation of the original loan or as a new loan. If it is treated as a new loan, it is a refinance as well as a loan modification.

However, most refinances are done for other reasons. One important one is debt consolidation, where several loans or outstanding debts (credit cards etc) are consolidated into a single loan. Another is to secure a better interest rate - for instance, if the original loan was a low-doc or no-doc loan and the borrower now qualifies for a full-doc loan with a lower interest rate; or if a fixed-rate loan is about to reach the end of the fixed-rate period and convert to the standard variable rate, refinancing to a basic variable loan may be useful.