Loan Modification Can Lower Your Monthly Mortgage Payment With A Willing Lender

Q: I have an adjustable rate mortgage (ARM) on my home and would like to lock in the rate without having to refinance. Is there a “loan modification” that would enable me to do this or is my only alternative to refinance?

A: At various times over the past 20 years, some lenders have offered to modify the terms on borrowers loans quickly and with simple loan documentation. Some times that process is referred to as a streamline loan modification or streamline refinance. Lenders have used different names for this process over time so you shouldn’t get hung up on the name.

The essence of the process is that the lender would allow you to modify the rate on your loan for a period of time by signing a simple document. You may or may not have to pay a fee to the lender for the process, but you get the benefit of a reduced rate for a period of time.

But while some lenders will do that, the vast majority will not. Why? If your loan is owned and serviced by a lender, that lender has the ability to work with your loan in any way it might want, especially if it wants to keep you as a customer.

However, if your loan was sold off to a pool of investors, as most home loans are, the servicing company for your loan may be unwilling or unable to change the terms of your loan, particularly if you are not delinquent with your payments.

In coming months we may see loan servicers obtain the authority they might need to deal with borrowers who are current on their loans but need assistance in refinancing or changing their loan terms.

For now, however, if your lender can’t or won’t help you out, you’ll have to do a refinance if you want to change the terms or interest rate on your loan.

One interesting bit of information is that many borrowers with adjustable rate mortgages (ARMs) are finding that the interest rate on their loan is actually going down as their loan resets.

For loans that are tied to the United States Treasury Rates and LIBOR (the London Interbank Offer Rate), the approximate one year Treasury Rate is around one percent and the one year LIBOR rate is a bit over 1.5 percent. Most ARM loans add a margin of profit to the base rate. That margin can be around 3 percent, although some loan margins are higher or lower.

Given that margin and today’s interest rates, an ARM loan adjusting to the Treasury Rate would adjust today to about 4 percent (or less) and an ARM loan adjusting to the LIBOR rate would change today to about 4.5 percent. Your loan documents should spell out how your interest rate would change and what index your loan is tied to. You can also contact your loan servicer and ask what your loan terms are and how much the interest rate will change.

If you only plan to live in the home a couple of years, you may find that your new ARM rate is a better deal than refinancing to a higher rate with the added costs of refinancing.

On the other hand, if you plan to live in the home a long time, you may decide to lock in today’s lower rates, particularly if you think interest rates will go up significantly in the future.