Oct 8, 2024
With mortgage interest rates falling, homeowners are hunting ways to cut their monthly payments.
Refinancing remains hugely popular, but a lesser-used hack could also save you hundreds each month: mortgage rate modifications.
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The best part of this strategy? All you have to do is ask.
A mortgage rate modification is an agreement between a borrower and their lender to adjust the interest rate on a loan without a full refinance.
Unlike refinancing, which involves replacing your existing mortgage with a new one (often with different terms and costs), a rate modification simply alters the interest rate of your current loan, lowering monthly payments and reducing interest over the life of the loan.
Mortgage rate modifications are typically associated with loan modifications designed to help borrowers avoid default or foreclosure. Some lenders offer rate modifications proactively to retain good customers when market rates drop. But do you really want to wait for the lender to make the first move?
Why consider a rate modification now?
Interest rates are dropping but remain relatively high, so homeowners with mortgages locked in at higher rates stand to benefit significantly from a lower rate. But the costs and hassles associated with refinancing — closing costs, appraisal fees, and extensive paperwork — are enough to send anyone looking for something better.
A rate modification gets around many of these hurdles. Since you’re merely adjusting the terms of the existing loan, the process is usually faster and cheaper, and involves less paperwork.
How to get a rate modification
Before approaching your lender, understand your existing loan terms, including the interest rate, remaining balance and any clauses related to modifications or prepayment penalties.
Knowing the current interest rates for mortgages like yours will strengthen your position when negotiating with your lender.
Next, it’s time to contact your loan officer or customer service representative to explore what’s possible. Be ready to demonstrate your good credit score and consistency with on-time payments, since lenders are more inclined to accommodate reliable borrowers to retain their business.
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Now it’s time to negotiate terms. Be prepared for rejection. After all, the lender has its agreement and isn’t obligated to change the terms. But if your lender is open to it, be ready to discuss possible fees associated with the modification. While some lenders may charge a nominal fee, it’s often significantly less than the costs associated with refinancing.
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Compare to traditional refinancing
The most appealing difference between rate modifications and refinancing is cost: Refinancing often involves closing costs ranging from 2% to 6% of the loan amount, appraisal fees, and other expenses. Rate modifications usually come with minimal fees, if any.
The paperwork load may also be lighter. Refinancing requires a full application process, credit checks, income verification and often an appraisal. Changing the rate is simpler, because the lender already has your information on file.
How can it save you money?
Here’s why it’s worth asking.
Suppose you have a $300,000 mortgage with a 30-year fixed rate at 5%. Your monthly principal and interest payment would be approximately $1,610. If market rates drop and your lender agrees to modify your interest rate to 4%, here’s how the numbers change:
New monthly payment: Approximately $1,432
Monthly savings: $178
Annual savings: $2,136
Extra considerations
While typically lower than refinancing costs, some lenders may charge a fee for modifying the loan. Ensure that the savings outweigh any expenses.
Secondly, confirm that other loan terms indeed remain the same. Some lenders might try to adjust other aspects of the loan during modification. Unlike refinancing, a rate modification generally doesn’t require a hard credit check, so it shouldn’t affect your credit score.
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Chris Clark is a Kansas City–based freelance journalist covering personal finance, housing and retirement. A former Associated Press editor and reporter, he writes plainspoken stories that help readers make smarter financial decisions.
