Do you want to lower your mortgage rate without traditional refinancing? Look up “loan rate modification,” which does just that.
Instead of contacting lenders, filling out applications, and submitting a bunch of paperwork, you may be able to get payment relief by simply signing a modification agreement.
Besides being easier than repurchasing, it can reduce processing time from a month to just a week or so.
That means if you start the process at the beginning of the month, your next loan payment could be lower.
While that all sounds great, there are some limitations to be aware of, and like renewals, fees are always charged.
How Mortgage Rate Conversions Work
As the name suggests, a loan modification allows you to lower the interest rate on your existing home loan without going through the formal refinancing process.
Instead, you are asked to complete a modification agreement with your current loan information, including the loan amount and loan product, as well as the desired loan program and current interest rate.
For example, if you currently have a 30-year mortgage at 7%, you can enter it into the form and select the type of loan you would like to go forward with.
This could be another 30-year fixed, or perhaps a 15-year fixed or adjustable-rate loan if approved.
Or you may be holding an ARM loan and want to switch to a fixed-rate product at the same time, removing the risk of future rate adjustments and locking in a lower rate in one go.
Generally, the lending institution will use the current advertised loan rate as the new loan interest rate.
So if credit union X offers a rate of 5.875% on its rate sheet that day, you can get a rate more than a full point lower using our example from above.
The loan will be refinanced using the new mortgage rate and the remaining term of the loan to determine the monthly payments.
While that can lead to good monthly savings, and reduce your interest costs, there is usually a fee.
How much does it cost to change your mortgage rate?
As noted, this type of work is free of charge. You will need to pay a fee, just like you would if you were renovating.
Banks don’t do it out of the kindness of their hearts. So expect a low fee, like $999, or a percentage fee based on the loan amount.
For example, you may be charged anywhere from 0.5% to 1% of the outstanding loan balance for a modification.
To do the math, a $500,000 conversion would cost anywhere from $2,500 to $5,000 to do.
That’s not a small number for many families and it can be cost prohibitive, especially if you’re looking for help paying off.
However, sometimes there are caps on the fee that can be charged, so even if it charges a percentage, it could be up to $2,000.
Conversely, there may be a small down payment, so even if you have a small loan amount, you may be charged a small dollar amount.
Another consideration is that closing costs often cannot be included in the loan amount. So you will need to come out of pocket to make the deal.
Which Lenders Allow Loan Modification?
From what I’ve seen, loan modifications are often offered by local credit unions and sometimes by big savings banks.
Both types of lending institutions have loans in their portfolios (as opposed to selling them), which gives them more control over the process.
Therefore, these types of offers are very rare for consumer mortgage lenders and non-bank lenders, who often sell the loans they receive shortly after closing.
In other words, you may have better luck getting approved for this type of thing through a credit union or bank. But it doesn’t hurt to ask anyway.
Try to reach out to the loan servicer if the loan has been sold, as the originator will likely not be able to extend the offer.
Chances are they will try to steer you towards refinancing your mortgage if they can’t or won’t offer a loan modification.
Mortgage Modification vs. Refinance
While both refinancing and refinancing, namely refinancing and refinancing, result in a lower interest rate, there are key differences.
Perhaps the biggest is that traditional renovations tend to take longer and are more involved.
It includes a fully completed loan application, verification of income, assets, and employment, a credit check, and a possible home inspection.
Conversely, a change of standard may be as simple as filling out a form while bypassing document collection and inspection.
Plus, you won’t have to worry about all the closing costs associated with refinancing, including title and escrow fees, lender fees (excluding conversion fees), and so on.
However, rate modifications are not available for all types of loans, and may be limited to owner-occupied homes.
And there’s a good chance you’ll only be able to qualify for one rate change per year, and you may need to make a minimum number of payments before you qualify.
You’ll also need money to complete the conversion, while it’s possible to apply for a no-cost refund where no out-of-pocket money is required.
Another limitation with rate swaps is that you can’t pay discount points to get an even lower rate.
So you will be able to get the market rate and nothing better, assuming you wanted to lower your rate.
And finally, regular financing can allow you to skip a payment (or two), which can benefit those who need some help with the payment.
Advantages and Disadvantages of Mortgage Modification
Pros
- You can downgrade without a refund
- Get a cheaper monthly payment for the same term of the loan
- It doesn’t reset the clock to stay on track to pay off your loan
- Can change loan plans (ARM to fixed rate loan)
- It does not require an appraisal or a formal loan application
- The process is usually very quick and easy (2 weeks or less)
- No closing costs other than a maintenance fee (varies by bank/lender)
Cons
- You have to pay a switching fee (a fee or % fee)
- You cannot add money to the loan amount (you have to pay out of pocket)
- Rate improvements are limited to the market rate at the time of application
- May be limited to owner-occupied buildings only
- May be limited to one repair per year
- It may require a minimum number of monthly payments before you qualify
- No withdrawals are allowed
Continue reading: How to lower your mortgage without refinancing.
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