Before you refinance

Before you refinance your mortgage to take advantage of lower interest rates, consider asking for a loan modification.  A loan modification is a change to the terms of your existing mortgage whereas a refinance means taking out a new loan and paying off the original loan.

Why?

Refinancing a mortgage comes with a number of closing costs.  Costs will include an appraisal, title search and various other origination fees.  A loan modification will usually require some documentation on your part but generally does not require the broader range of closing costs.

Who is eligible?

Not all lenders offer loan modifications and the only way you’ll know for sure if you are eligible for a loan modification is to ask your lender (who may not be the same as your loan servicer).

Aren’t loan modifications only for struggling borrowers?

It’s true that we heard lots about loan modifications around 2008 and during the recession that followed.  In those cases many banks offered loan modifications to struggling homeowners because, with a modified loan, the lenders were more likely to get something rather than nothing – and they really don’t want to end up with a foreclosed property on their hands. However, loan modifications are also done for customer retention purposes.  If they’re interested in keeping you as a customer, a loan modification can be a win-win situation – you get a lower interest rate and they get to keep you as a customer.

Is a loan modification free?

No.  A loan modification is generally not free.  However, it usually involves a very straightforward and one-time fee.

Is a loan modification always a better deal?

You should always carefully read any offer and run the numbers before accepting a modification.  While you may request only an interest rate reduction, the lender may come back with a different offer including changes to the term or to the length of time that the interest rate is fixed.  Be sure you understand any contract before signing it.