Before You Refinance, Modify Your Loan ... If You Can

A colleague who was looking to refinance his mortgage to today’s record low interest rates, just told me that he opted instead for a “modification.”

No, he’s not behind on his monthly payments, nor even struggling to make them. He is current, and modifications on current loans have been around for years, though they are increasingly rare and consequently few people know about them.

My colleague’s bank, New Jersey-based First Niagara, allowed him to do the modification to a lower interest rate. Here’s the best part: My colleague had to pay just $500 for his 7/1 Adjustable Rate Mortgage (ARM) to go from 4 percent to 3.125 percent, which is an eighth of a percentage point above the going rate, but still a great move. No principal payment, no new underwriting, no nothing.

I called First Niagara and asked if they do mortgage recasts. The first agent said yes, but when I asked to be transferred to a mortgage specialist, and then identified myself as a reporter, I was disconnected … three times.

On the fourth try, I did finally get a nice agent, who called another department and said yes, they do modifications, but more often do "recasts," in which case a sizeable principal payment is required. Hmmm. Then she said she had to leave a message for someone to give me more details. Still waiting.

Apparently mortgage recasts do exist.

An article on Bankrate.com refers to this as “re-amortizing” a home loan to avoid the “hassle and expense of refinancing.” It says these can cost as little as $250 in some cases, but can require an additional sum of money to “substantially reduce the unpaid principal balance of the loan,” according to a quote from Bank of America’s Kris Yamamoto. The interest rate is unchanged, but the monthly payment is lower, due to the lower principal balance.

A Wells Fargo spokesman told bankrate that recasts “are rare, in part because not all loans are eligible.” No FHA/VA and jumbos depend on each individual loan.

“Years ago, there were some company’s offering automatic rate reduction loans, and I believe the language may have been written into the mortgage,” says Craig Strent of Apex Home Loans. “I have seen Citi do it on ARM loans in the past and other smaller ARM lenders use it regularly, but to my knowledge it’s not an industry wide practice currently with the big guys.”

I called over to New Jersey based Hudson City , which my colleague said also did loan recasts. The agent I spoke with, however, says they stopped doing these in December. When I asked why, she just said, “It was discontinued.”

Another expert I spoke with, Guy Cecala of Inside Mortgage Finance, tells me that while it’s not common, if the bank offers a modify, it could be a good option, assuming the servicer owns your mortgage.

“In the case you described, a borrower could probably get a conventional conforming 7/1 ARM for 2.75-2.85 percent, so at 3.125 percent the bank is still making a healthy profit when you consider they are funding the loan off of deposits that cost them less than 1 percent,” reasons Cecala. “If they don’t modify the mortgage, the bank runs the very real risk of losing the loan to a refi with another lender.”

Another colleague of mine, hearing of this and considering a refi, called her lender. She was told she would have to pay down the balance of her conforming 30-year fixed rate loan (which she refinanced a year ago) by $10,000 and then there would be a $500 processing fee. That would reduce her monthly payment less than 5 percent and stretch the payments back out to 30 years.

“It makes no sense to spend 10 grand to reduce my payment so little,” she decided.

It seems both modifications to current loans and recasts exist on a loan-to-loan and lender-to-lender basis, but given the expense and paperwork involved in refinancing, it’s certainly worth asking about.

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