|Mortgage modification, easy
You don't always have to spend a lot to reduce your
mortgage's interest rate.
Lucky homeowners can "modify"
their mortgages, paying their existing lender a few hundred dollars
in exchange for a reduced interest rate on the current loan.
"Rates have been dropping.
People have been refinancing. It doesn't hurt to ask for a modification,"
says Jim DuBose, president of Colonial Savings, a mortgage lender
based in Fort Worth, Texas.
Modification vs. refinancing
Loan modification, DuBose says, is "pretty painless. We
send them a couple of things to sign. It's not like going through
another closing." He cautions, though, that it doesn't happen
often because Colonial Savings, like most big lenders, sells most
of its mortgage loans on the secondary market. In that case, you
have to refinance the loan to get a lower rate.
If refinancing is your only option,
don't automatically switch lenders. Shop first with your current
loan servicer. It might offer you a "streamlined" refinancing,
requiring less money, paperwork and time than other lenders require.
The difference between a modified
mortgage and a streamlined refinancing lies in the length of the
loan. When you modify a mortgage, you keep repaying the same loan.
When you refinance, you start all over again with a new loan.
Let's say you have a 30-year mortgage
and have been paying it for five years. If you modify the loan at
a lower rate, you still have 25 years remaining on your mortgage.
It's the same loan, at lower interest. On the other hand, if you
refinance the mortgage, your old loan is paid off and you start
off with a brand-new loan for the term you choose, whether it's
15, 20 or 30 years or some other period.
In practice, the line between modified
and refinanced mortgages gets blurry. Some lenders call it a modification
if you have an adjustable-rate mortgage and switch to another mortgage
with the same lender.
Not every mortgage can be modified -- in fact, the majority
can't. Most mortgage lenders don't hold onto your loan for long.
They sell it to Fannie Mae, Freddie Mac or Ginnie Mae. The government-sponsored
enterprise, in turn, bundles your mortgage with others to create
a mortgage-backed security, which works somewhat like a corporate
bond. Investors buy these securities.
You can no more change the interest
rate on a securitized mortgage than a farmer can buy back his corn
crop after it has been sold, stored in a grain elevator with other
farmers' crops, loaded onto rail cars, and packed into sacks of
cattle feed. Because you can't change the interest rate on a securitized
mortgage, you can't get a modification.
"The only people who really
modify loans would be portfolio lenders," DuBose says.
A portfolio lender keeps loans
on its books instead of selling them on the secondary market. Many
lenders, such as DuBose's Colonial Savings, sell most of their long-term
mortgages but keep a few in their portfolio. Credit unions are likelier
than banks to hold mortgage loans in their portfolios.
If the lender sold your loan, don't despair. Ask if you can
get streamlined refinancing. You pay fees for a streamlined refinancing,
but the lender might not require a credit report or appraisal. Those
two items alone can cost $350 or more. Appraisals usually take several
Bottom line: When hunting for a
lower mortgage rate, call your loan servicer's customer-service
number in the coupon book or monthly statement. "Ask if current
customers have any special deals available to them," says Susan
Huber, senior vice president of investor relations for SunTrust
At SunTrust Mortgage, a streamlined
refinancing requires limited paperwork. "We're just looking
at the payment history and then we are going to need to get some
kind of value determination," Huber says. The bank doesn't
require a full appraisal to determine a home's value for a streamlined
refinancing; instead, the bank will use an automated valuation,
in which a computer program estimates the home's value.
If the mortgage is less than a
year old, SunTrust doesn't even require an automated valuation.
"You can close these loans very fast," Huber says. "Let's
say we had a conforming loan that was less than 12 months old that
the borrower paid on time -- we're not looking for any documentation
at that point. We could probably do it in just a couple of days.
At that point all you need to do is put the closing documents together."
This explains why it pays to shop.
Another lender might offer a lower rate but higher fees than your
current lender would charge for a streamlined refinancing. You have
to do the math to figure out which deal is better. If you plan to
stay in the house for a long time, the lower rate and higher fees
might make sense. If you plan to move out within two or three years,
it might be cheaper to take the slightly higher rate and lower fees.