Loan modification: the new refinance

Let’s say you bought your present home in November of 2018, just about a year ago. You wanted a fixed-rate loan, so you selected a reputable lender, who offered a 30-year loan fixed at 4.75% interest rate. You borrowed $200,000, so your monthly principal and interest payment is around $1,043.

Since then, you’ve heard me say a hundred times right here that rates have dropped and you should refinance, and even though rates are lower today, you were discouraged to find out just how much lenders charge for the refinance.

You called your current lender, and they offered to refinance your current balance (essentially $200,000) at a new lower interest rate of 3.5% per annum.  Your new payments drop to about $898, a monthly savings of $145. This is a no-brainer, right?

Not so fast.  Your lender is requiring a full new loan application, including a new appraisal and a new full loan package, costing you a full new set of “closing costs” of up to 3% of the loan amount, or about $6,000.

At this rate, even though the monthly payments are reduced by $145, it will take over three years for you to break even. So you come to the conclusion that you will stick with the loan you have and save the closing costs of $6,000.

But there may be another option!

What if your lender offered to simply modify your existing loan from your current interest rate to simply lower the rate from 4.75% down to 3.5%. No formal application, no new appraisal, no origination fees and no new set of closing costs?

Well, I can’t promise that your current lender is willing to do this, but it’s worth asking about. It might save you thousands of dollars!

It’s called a LOAN MODIFICATION, and it usually not offered as an option to existing borrowers like you and me.  That’s because the lender wants to keep you on the hook for the higher interest rate as long as possible.

But rather than lose you altogether as a good customer, your current lender MAY offer you a LOAN MODIFICATION, but usually only if you ask.

So let’s assume your lender ADMITS that a modification is available.  If this is the case, the lender need only draw up a few documents to change the numbers in the original loan documents. This is in contrast to the huge pile of documentation that confronts you at a typical new loan origination.

By eliminating everything from the appraisal to the origination fee to the closing statement itself, a tremendous amount of money is saved. And typically, the lender charges you just the expenses it incurs for the modification, a much simpler and streamlined process.

Here is what you need to know about loan modifications:

1.  They are usually offered ONLY on loans held in portfolio, and are often limited to loans with a clean payment history.

2.  Lenders do not typically advertise that they offer modifications, as they prefer that you get a new refinance loan and thus pay a full new set of closing costs. You’ll have to ASK.

3.  Some lenders will turn down a modification if anything other than the rate has changed. For example, if there has been a divorce, or the property lines have been modified.

4.  In many cases, the lender will send you the documents, and require that you sign them before a Notary Public. Often, no attorney is necessary. That saves money as well.

BOTTOM LINE:  Depending on your existing home lender’s policies, you may be able to MODIFY your current loan rather than force you to pay much more for a complete refinance application. Your savings may be in the thousands of dollars.