Want to lower your mortgage rate without resorting to traditional refinancing? Search for “adjustable rate mortgage,” which does just that.
Instead of having to contact lenders, fill out applications, and submit piles of documents, you may be able to get payment relief simply by signing a modification agreement.
In addition to being easier than refinancing, it can reduce processing time from a month plus to just a week or so.
This means that if you start the process early in the month, your next mortgage payment may be lower.
While this all sounds great, there are some limitations you should be aware of, and like refinancing, fees are usually charged as well.
How does a mortgage rate adjustment work?
As the name suggests, a rate adjustment mortgage allows you to lower the interest rate on your current home loan without having to go through the formal refinancing process.
Instead, you are simply asked to fill out a modification agreement with your current loan information, including your mortgage rate and loan product, as well as your desired loan program and current interest rate.
For example, if you currently have a 30-year fixed mortgage with a 7% fixed interest rate, simply enter that into the form and then select the type of loan you would like to have in the future.
This could be another 30-year fixed loan, perhaps a 15-year fixed loan or even an adjustable rate mortgage if allowed.
It’s also possible that you have an ARM loan and want to move to a fixed-rate product at the same time, eliminating the risk of a future rate adjustment and getting a lower interest rate in one step.
The lending institution typically uses the current advertised interest rate on the loan as the new interest rate on the loan.
So, if Credit Union X is offering a 5.875% interest rate on its rate schedule that day, you could get a full percentage point lower interest rate using our example above.
The loan will then be re-amortized using the new mortgage rate and remaining loan term to determine the monthly payments.
Although this can result in some nice monthly savings, and reduce your overall interest expense, there are usually fees.
How much does a mortgage rate adjustment cost?
As mentioned, this type of transaction is not free. You will have to pay a fee, just like with refinancing.
Banks don’t do this out of kindness, so expect either a flat fee, like $999, or a percentage fee based on the loan amount.
For example, a fee of 0.5% to 1% of the outstanding loan balance may be charged for the modification.
Doing the math, a $500,000 modification could cost between $2,500 and $5,000 to fix.
This is not a small number for many families and can actually be quite expensive, especially if you are looking to reduce your payment.
However, there are sometimes limits on the fees that can be charged, so even if they charge a percentage, the maximum can be as high as $2,000.
Conversely, there may be a minimum fee as well, so even if your loan amount is small, you may be charged a minimum dollar amount.
Another consideration is that closing costs typically cannot be rolled into the loan amount, so you will need to pay the money out of your own pocket to close the deal.
Which lenders allow mortgage rate adjustments?
From what I’ve seen, mortgage rate adjustments are most often offered by local credit unions and sometimes by larger depository banks.
Each of these types of lending institutions holds the mortgages in their own portfolios (as opposed to selling them), giving them more control over the process.
As such, these types of offers are less common with direct-to-consumer mortgage lenders and non-bank lenders, who often sell the loans they issue shortly after closing.
In other words, you may have better luck getting approval for this kind of thing through a credit union or bank. But it doesn’t hurt to ask anyway.
Try to contact the loan servicer if the mortgage is being sold, as the loan holder is unlikely to be able to make an offer.
They will likely try to steer you toward refinancing your mortgage if they can’t or won’t offer a mortgage rate adjustment.
Mortgage Rate Adjustment vs. Mortgage Refinance
Although both rate adjustment and mortgage refinancing, that is, rate and term refinancing, result in a lower interest rate, there are key differences.
Perhaps the biggest of these problems is that the traditional refinancing process takes longer and involves more involvement.
This includes submitting a complete loan application, verifying income, assets, employment, credit checks, and possibly a home appraisal as well.
Conversely, adjusting the rate may be as easy as filling out a form and skipping the documentation and evaluation.
Plus, you won’t have to worry about all the closing costs associated with refinancing, including title and escrow fees, lender fees (other than modification fees), etc.
However, rate adjustment is not available for all loan types, and may be limited to owned homes only.
There’s also a good chance that you’ll only be able to qualify for one rate adjustment per year, and you may need to make a minimum number of payments before you qualify.
You will also need money to complete the modification, while it is possible to apply for a no-cost refinance where no money is required out of your pocket.
Another limitation to price adjustments is that you cannot pay discount points to get a lower price.
So, you will only be able to get the market rate and nothing better, assuming you want to lower your interest rate.
Finally, a conventional refinance may allow you to skip a payment (or two), which can be beneficial for those who need significant payment relief.
Mortgage Rate Adjustment: Pros and Cons
Pros
- You can lower your interest rate without having to refinance.
- Get a cheaper monthly payment for the same loan term.
- It doesn’t reset the clock so you stay on track to pay off the loan.
- It may be possible to switch loan programs (variable rate loan to fixed rate loan).
- No appraisal or formal loan application required.
- The process is usually very quick and relatively easy (two weeks or less).
- There are no closing costs other than modification fees (which vary by bank/lender)
Negatives
- You must pay a fee for the amendment (either a flat fee or a percentage fee).
- Fees cannot be included in the loan amount (must be paid out of pocket)
- Rate improvement is limited to the market price at the time of application.
- May be limited to owner-owned properties only.
- May be limited to one modification per year.
- A minimum number of monthly payments may be required before you qualify.
- No cash withdrawal allowed
Continue reading: How to Lower Your Mortgage Rate Without Refinancing.
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