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Why Reduce My Rate?

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Posted On: 03/09/2011

QUESTION:

My lender contacted me out of the blue and offered to reduce my interest rate. I'll get a new 30-year, fixed-rate mortgage, save several hundred dollars per month, and they'll pay all closing costs. I just don't get it. Why would they do this?

ANSWER:

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If you've been paying your mortgage and have equity in your home, that will make your lender very happy. The catch is that other lenders will see you as a strong candidate for refinancing - which means if you refinance with another institution your current lender will lose a paying borrower.

Most likely your current lender offered you a new deal for two reasons:

1. They're playing defense. They want to keep you as a borrower.

2. There are no conditions under which they will offer you a lower rate and take a loss just to keep you as a borrower. They're offering you a better rate than you now have but a rate which is high enough in today's market so they can resell the mortgage to investors at a profit.

A caution: When receiving an unsolicited offer from your "current lender" make sure it's actually your real lender who is in contact and not someone just using your lender's name.

QUESTION:

I've just lost my job, and as a result things have become very tight. With my spouse's salary we can make it from month to month to pay the mortgage. Can the lender end the loan because we have less household income?

ANSWER:

No. The lender cares that you qualified when you obtained the loan, otherwise your application would have been declined. And the lender wants those monthly payments, otherwise you could face late fees and perhaps foreclosure if payments are not made. However, as long as the monthly payments are full and timely you're meeting your obligations and the lender has no grounds to somehow end the loan, extract penalties or change its terms.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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