When mortgage rates drop, homeowners often wonder if they will be able to take advantage of lower rates. In general, lenders require borrowers to refinance into a new home loan in order to change their mortgage rate, requiring an appraisal and closing costs. However, there is another way to lower your mortgage rate without refinancing: a loan modification.
Loan modification to lower mortgage rates
If you are having trouble keeping up with your monthly mortgage payments, you can apply for a loan modification to reduce your interest rate and hence, lower your monthly payments. A lender will review your current mortgage and financial circumstances before deciding to approve or deny you for a modification.
If you are having trouble paying your mortgage, you should contact your lender immediately to discuss your options and the possibility of a loan modification. You will be required to explain your hardship in writing and will need to provide documentation, including tax returns, pay stubs and other paperwork that reflects your income and assets.
The government's Home Affordable Modification Program (HAMP) has specific guidelines that must be met in order to participate in their program. That said, some lenders have their own modification programs -- known as private or proprietary modifications -- and so are willing to work with you on an individualized basis rather than foreclosing on the property.
Lower mortgage rates for non-distressed homeowners
Some financial institutions, including M&T Bank, for example, have offered to reduce mortgage rates for their customers with a loan modification even when they are not having trouble making payments. At M&T, the program is available only on loans the bank owns and services. Borrowers must be up-to-date on their payments, meet minimum credit score requirements and pay a fee to lower their interest rate. The loan payments are recalculated based on the new interest rate for the remaining years of the loan.
Michele Lerner contributed to this answer
A 25-year expert observer of the mortgage and consumer debt markets, Keith Gumbinger has been cited in thousands of articles covering a wide range of consumer finance and economic topics in outlets ranging from the Wall Street Journal to the Bottom Line newsletters. He has been a featured guest on national broadcasts for CNN, CNBC, ABC, CBS and NBC television networks and has been heard on NPR and other national and local radio programs. Keith is the primary researcher and writer for HSH.com's MarketTrends newsletter and has authored or co-authored a number of consumer guides on mortgages, home equity, refinancing and more.