Want to lower your mortgage rate without a traditional refinance? Look into a “mortgage rate modification,” which does just that.
Instead of having to contact lenders, fill out applications, and provide stacks of paperwork, you might be able to get payment relief by simply signing a modification agreement.
Aside from it being easier than a refinance, it could cut the processing time down from a month plus to just a week or so.
That means if you start the process early in the month, your very next mortgage payment could be lower.
While that all sounds great, there are some limitations you should be aware of, and like a refinance, fees are typically charged as well.
How a Mortgage Rate Modification Works
As the name suggests, a mortgage rate modification allows you to lower the interest rate on your existing home loan without going through the formal refinance process.
Instead, you are simply asked to fill out a modification agreement with your current loan information, including mortgage rate and loan product, along with desired loan program and current interest rate.
For example, if you currently hold a 30-year fixed-rate mortgage set at 7%, you’d enter that into the form and then select the type of loan you’d like going forward.
This could be another 30-year fixed, or perhaps a 15-year fixed or even an adjustable-rate mortgage if permitted.
Or it’s possible you hold an ARM loan and want to move into a fixed-rate product at the same time, removing future rate adjustment risk and snagging a lower rate in one move.
Typically, the lending institution would use the current advertised mortgage rate as the new interest loan on the loan.
So if credit union X is offering a rate of 5.875% on their rate sheet that day, you could obtain a rate more than a full percentage point lower using our example from above.
The loan would then be re-amortized using the new mortgage rate and remaining loan term to determine monthly payments.
While that would result in some nice monthly savings, and reduce your total interest expense, there is typically a fee.
How Much Does a Mortgage Rate Modification Cost?
As noted, this type of transaction isn’t free of charge. You will need to pay a fee, just as you would for a refinance.
The banks aren’t doing it out of the kindness of their hearts. So expect either a flat fee, such as $999, or a percentage fee based on the loan amount.
For example, you might be charged anywhere from 0.5% to 1% of the outstanding loan balance in exchange for the modification.
Doing the math, a $500,000 modification could cost anywhere from $2,500 to $5,000 to process.
That’s not a small number for many households and could in fact be cost-prohibitive, especially if you’re seeking payment relief.
However, there are sometimes caps on the fee that can be charged, so even if they charge a percentage, it might top out at say $2,000.
Conversely, there could have a minimum fee as well, so even if you have a small loan amount, you might be charged the minimum dollar amount.
Another consideration is closing costs typically can’t be rolled into the loan amount. So you’ll need to come up with the funds out-of-pocket to get the deal done.
Which Lenders Allow Mortgage Rate Modifications?
From what I’ve seen, mortgage rate modifications are most commonly offered by local credit unions and sometimes larger depository banks.
Both of these types of lending institutions hold mortgages in their own portfolios (as opposed to selling them off), which gives them more control over the process.
As such, these types of offers are less common with direct-to-consumer mortgage lenders and nonbank lenders, which often sell the loans they originate shortly after closing.
In other words, you might have better luck getting approved for this type of thing with a credit union or bank. But it doesn’t hurt to ask regardless.
Try reaching out to the loan servicer if the mortgage was sold, as the originator likely won’t be able to extend an offer.
Chances are they’ll try to guide you toward a mortgage refinance if they can’t or don’t offer a mortgage rate modification.
Mortgage Rate Modification vs. Mortgage Refinance
While both a rate modification and a mortgage refinance, namely a rate and term refinance, result in a lower interest rate, there are key differences.
Perhaps the biggest is that a traditional refinance tends to take a lot longer and is much more involved.
It includes a full-on loan application, verification of income, assets, and employment, a credit pull, and possibly a home appraisal as well.
Conversely, a rate modification might be as easy as filling out a form while skipping the document collection and appraisal.
In addition, you won’t have to worry about all the closing costs associated with a refinance, including title and escrow fees, lender fees (other than the modification fee), and so on.
However, a rate modification isn’t available on all types of loans, and may be limited to owner-occupied homes only.
There’s also a good chance you’ll only be able to qualify for one rate modification per year, and you might need to make a minimum number of payments before you’re eligible.
You’ll also need money to complete the modification, whereas it’s possible to apply for a no cost refinance where no money is required out-of-pocket.
Another limitation with rate modifications is you can’t pay discount points to get an even lower rate.
So you’ll just be able to get the market rate and nothing better, assuming you wanted to buy down your rate.
And lastly, a traditional refinance may allow you to skip a payment (or two), which can be beneficial to those who need some major payment relief.
Mortgage Rate Modification Pros and Cons
The Pros
- You can lower your rate without refinancing
- Obtain a cheaper monthly payment with the same loan term
- Doesn’t reset the clock so you’ll stay on track paying down the loan
- May be able to switch loan programs (ARM to fixed-rate loan)
- Doesn’t require an appraisal or formal loan application
- Process is typically very fast and relatively easy (2 weeks or less)
- No closing costs other than the modification fee (which varies by bank/lender)
The Cons
- You must pay a fee for the modification (either flat fee or % fee)
- Can’t roll the fee into the loan amount (must pay out-of-pocket)
- Rate improvement limited to market rate at time of application
- May be limited to owner-occupied properties only
- Might be limited to one modification annually
- May require a minimum number of monthly payments before you’re eligible
- No cash out allowed
Keep reading: How to lower your mortgage rate without refinancing.
