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Modification: One-Time Thing?

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Posted On: 09/08/2010

QUESTION:

Whatever happened to the loans where for a one-time fee you could get a mortgage modification with a lower interest rate regardless of your income or equity?

ANSWER:

In the 1980s and 1990s there used to be a financial creature called a convertible adjustable-rate mortgage. With such loans you took out an adjustable-rate mortgage and then had a one-time opportunity to convert to a fixed-rate, usually within the first five years of the loan term.

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The great attraction of such loans was that at some point you could lock in a rate that might be substantially lower than the rates that were available when you first took out the loan. Also, because this was a mortgage modification and not a refinancing with a new loan there was no need for a new and costly closing. A first mortgage would stay a first mortgage.

This sounds attractive, but, as usual, there were some concerns. First, there was a conversion fee, typically $250 to $500.

Second, the new rate was typically pegged at .625 percent to .750 percent above the interest level at the time of the conversion. That’s a huge premium, enough to make borrowers wonder whether it would be better to actually get a new mortgage despite the refinancing costs.

Today convertible ARMs are as common as dial telephones. In terms of dollars, it’s often cheaper to get a “no cost” refinance – that’s a mortgage where some or all of the closing costs are paid by the lender in exchange for an interest rate that is somewhat higher than prevailing market levels. However, with a no-cost refinance you’re replacing one loan with another and this could be a problem if you have more than one mortgage on your property.

If you need new financing, speak with your current lender and with other lenders as well. Consider what monthly savings you’ll get, what new financing will cost and how long you expect to keep the property.

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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