Lender Secret Now Leaking Out

Peter G. Miller
OurBroker®

There's something lenders don't want to tell you, a little secret that can save homeowners thousands of dollars.

It works like this: Rates have fallen and you want to refinance a fixed-rate loan. You contact your lender and discover that because you're a great and wonderful person and all your payments have been full and timely, you're qualified to refinance. New papers will be required, and that will mean a new closing, legal fees, survey, appraisal, and perhaps a bunch of taxes.

What lenders don't say is this: You may be able to refinance without the need to fill out 900 forms or pay big closing costs.

For instance, several years ago rates were down and I needed to refinance an investment property. I called the lender and said, "let's modify the loan."

I exchanged letters with the lender setting out the new terms. My attorney looked at the letter, the lender accepted, and that was it. Total cost: about $35.

What really happened was this: The property was not refinanced. Instead, the loan terms were modified. Because the terms of an existing loan were changed, there was no need to record a new loan. Since there was no new loan, there was also no need for a new closing, title search, or smaller checking account.

None of this is especially revolutionary. There are millions of adjustable rate mortgages and the terms for such financing change constantly with new rates and payments. When these changes are made, no one refinances. The terms change because both lender and borrower have agreed that the loan provisions can be modified.

We now have lenders who have gone public with ARM products where the initial rate is also the highest rate. If interest levels drop, the loan rate also falls.

Given the choice of an ARM where rates can rise and fall, or an ARM where rates can only fall, you can bet that few consumers will opt for the greater risk of possibly higher rates -- unless lenders want to make such loans attractive with significantly easier qualification terms, lower rates, and fewer costs.

But while the modification "genie" is now somewhat out of the bottle, there is more to go.

Not only can new ARMs be modified, so can millions of existing loans whether they are ARMs or fixed-rate products. If lender and borrower agree, loans terms can be changed to whatever might be mutually acceptable.

So the next time you get the urge to refinance, stifle that feeling and think "modification." Increasingly, lenders will welcome such thinking -- or lose your business.

Question Of The Week

Q I'm buying a new house and putting only 5% down. The house is scheduled to be completed in August, and as new phases are becoming available for sale values have been going up dramatically. I believe that when I move in I will have 20% equity. I want to remove my PMI as soon as possible. Can I have an appraisal done and petition for my PMI to be removed, or do I have to wait some period of time?

A Lenders want borrowers to obtain private mortgage insurance when homes are bought conventionally with less than 20 percent down. In your situation, the combination of your down payment and rising property values will likely give you 20 percent equity.

New federal rules say that lenders must end PMI requirements when most new borrowers have reduced loan balances by 22 percent -- something that can take years with typical amortization schedules. The requirement for lenders does not relate to equity, but only to paying down the original loan balance.

You thus have a situation where a lender cannot be compelled to immediately end PMI -- but you surely have the right to ask. I suspect that lenders will be pleased with your increased equity because it means less risk for them, but they will also want a better understanding of your credit standing and therefore may respond by saying, "let's talk after 12 payments."

Weekly Resource

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Published: May 11, 1999

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Editor's Note: This article reflects the opinions of Peter G. Miller only and not necessarily the views of this or any other publication, organization or Website owner.

Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .