When mortgage rates drop, homeowners often wonder if they will be able to take advantage of lower rates. In general, lenders require borrowers to refinance into a new home loan in order to change their mortgage rate, requiring the borrower to requalify, the house to pass an appraisal and the homeowner to again pay closing costs. However, there can be another way to lower your mortgage rate without refinancing: a loan modification.
Loan modifications for troubled homeowners
If you are having trouble keeping up with your monthly mortgage payments, you can apply for a loan modification to reduce your interest rate and hence, lower your monthly payments. A lender will review your current mortgage and financial circumstances before deciding to approve or deny you for a modification.
If you are having trouble paying your mortgage, you should contact your mortgage lender or servicer immediately to discuss your options and the possibility of a loan modification. You can find their number or their website address on your monthly bill or statement. Of course, you will be required to explain your hardship in writing and will likely need to provide documentation, including tax returns, pay stubs and other paperwork that reflects your income and assets.
The government’s Flex Modification has specific guidelines that must be met in order to participate in their program. For these modifications, your loan must be owned or backed by Fannie Mae or Freddie Mac; to see if either holds your mortgage, use Fannie Mae’s Loan Lookup Tool or Freddie Mac’s Loan Lookup Tool to get started.
That said, many lenders have their own modification programs — known as private or proprietary modifications — and so are willing to work with you on an individualized basis rather than foreclosing on the property. These are most common when the lender holds the loan in their own investment portfolio.
Loan mods to lower mortgage rates for non-distressed homeowners
Some financial institutions may offer to reduce mortgage rates for their customers with a loan modification even when they are not having trouble making payments. In most cases, the program would be available only on loans the bank owns and services — typically ARMs, jumbos and other « non-QM » products. In general, a borrower must be up-to-date on their payments, meet minimum credit score requirements and pay a fee to lower their interest rate. The loan payments are recalculated based on the new interest rate for the remaining years of the loan.
Prepaying your way to a lower rate
It’s a bit of a mathematical construct, but prepaying your mortgage can lower the effective interest rate on your mortgage. Although the math is complicated, the concept is pretty simple: Retiring your mortgage more quickly saves interest cost. and lower interest cost is usually what’s achieved with a refinance.
HSH’s PreFi sm Prepayment-is-equivalent-to-Refinance calculator (Prepayment::Refinance) can do the math for you. For example, you have a $200,000 loan at a 3% rate you took out in . You start making prepayments of $100 per month in . Your prepayment will save you $13, over the remaining term of your loan, creating an equivalent 2.574% interest rate for your mortgage.
If you want to achieve these savings by refinancing you would need to start the « amortization clock all over again at a new 30 years and get a new interest rate of 2.217% — and you’ll likely need to pay closing costs again, too.
It’s technically possible to engineer any (equivalent) interest rate you want via prepaying; all that matters is the amount. Pick a rate you would like to create for your mortgage and our LowerRate sm Prepayment Calculator will tell you the amount of prepayment you’ll need to create the same savings as a refinance at that interest rate. From the example above, if you want a 2% effective rate, you’ll need to prepay $ per month.