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Loan Modification in the Current Interest Rate Environment

Loan Modification in the Current Interest Rate Environment
Like many Americans, you may have put buying a new home on hold for any number of reasons. You’re concerned about everything right now — inflation, the economy, the housing market, the stock and bond outlook, and the current interest rate environment. 
But while your decision might be stalled, the housing market is still on the move. According to the National Association of Realtors®, in October the national median existing-home price rose 6.6% from a year ago to $379,100, marking 128 consecutive months of year-over-year gains. Despite the fact that existing home sales have been declining month over month through most of 2022, demand for the limited inventory of homes on the market remains relatively strong. Currently, homes go from listings to contracts in approximately 21 days.¹ 

So what happens when you stumble upon “the perfect house” when you least expect it — or more to the point, when the timing seems all wrong? That little voice inside you keeps nagging, “What’s not to love about that gorgeous house in the most sought-after neighborhood in the area — the one that checks off all the boxes on your list?” Nonetheless, in this current interest rate environment, you’re not convinced that now is the right time to make an offer on your dream property.

When you do decide that you’re ready to buy, you have many options available to finance your dream home. But one solution we explain for any mortgage transaction is our modification program.

Right Relationship is Everything
How the modification program works
When you’re ready to purchase a residential property, we suggest locking in the interest rate on an adjustable-rate mortgage (ARM) so you can take advantage of the lowest rate and the modification program. Let’s look at the following hypothetical scenario. 

You find your perfect home and your offer is accepted. The rate lock is on an ARM that is fixed for 10 years on a 30-year term mortgage. (This is referred to as a “10/1 ARM” because it’s fixed for a period of 10 years and can adjust on an annual basis after 10 years. The amortization schedule or “term” is for 30 years.)   

Let’s say you make an offer on a $500,000 home in December 2022, and your rate lock is 5.125% on a 10/1 ARM with a 30-year term. Then two years later (in December 2024), the interest rate landscape has changed, and rates have decreased by 1%. Your Private Banker can modify the rate down by 1% to 4.125%. Typically, the modification is processed by the next month’s payment due date. And, to clarify, you can modify the interest rate at anytime it makes an impactful difference and at any time during the life of the loan. In other words, if the rate declines by less than 1% and it makes sense to modify six months after the loan has closed, that is an option, too.

There is no limit to the number of times you can modify a loan.

The benefits of the modification option
Consider the following benefits of the modification option in this hypothetical scenario:
  • Once the modification request is processed, you receive a lower rate that results in lower principal and interest payments.

  • However, because this is a modification and not a refinance, the amortization schedule stays “as is.” In other words, the amortization schedule does not start over. This is important to note because at the beginning of an amortization schedule, a higher percentage of the payments go toward interest (versus principal).   

  • Here is another plus: The 10-year ARM starts all over for another decade when the rate is decreased and modified. Therefore, in 2024, your rate of 4.125% is fixed at 4.125% for another 10 years.

In the hypothetical scenario, you will pay less money in interest and payments, keep the amortization schedule “as is,” and extend your ARM out another two years.  Furthermore, every time there is a modification opportunity, the same benefits apply.  

How much does it cost?
There is a $1,000 fee to process each modification. But when you calculate the interest and payment savings at a 1% decrease, it may still make sense to proceed (as long as you don’t plan on moving in the near term). There is no appraisal, no income documents, no title charges, no stamp taxes (where applicable) or hardship letter required. You can request to modify when it makes financial sense (in savings) with one document for you to sign, in agreement with the lower rate and lower payment to start after the loan is processed, usually within 30 days. It is simply a matter of modifying your ARM to the current market rate as rates decline.

Refinancing under the modification program
The modification program is also available for clients looking for a refinancing option to fit their needs. For example, if you’re interested in refinancing your mortgage in a cash-out scenario for major home improvements, you can go through the same process, post-closing, and have the same benefits.

Talk to your Private Banker to discover the various ways our modification service is different from options offered by other financial institutions. You can also explore other solutions such as a second-lien renovation loan or a traditional home equity line-of-credit if one of these choices makes more sense than a cash-out scenario on a first mortgage.  

We can help
We’re here to help make your dreams a reality. Our team of financial professionals is here to answer all your questions about our modification service and the complete list of qualifications, as well as other tailored solutions for financing a new home during this challenging economic environment. Contact The Private Bank at Commerce Trust today. 

¹Michael Hyman, National Association of Realtors®, “Existing-Home Sales Fell for the Ninth Straight Month and Decline 5.9% in October 2022,” https://www.nar.realtor/blogs/economists-outlook/existing-home-sales-fell-for-the-ninth-straight-month-and-decline-5-9-in-october-2022, 
November 22, 2022. 

The opinions and other information in the commentary are provided as of January 18, 2023. This summary is intended to provide general information only, and may be of value to the reader and audience.
This material is not a recommendation of any particular investment or insurance strategy, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified tax advisor or investment professional. While Commerce may provide information or express opinions from time to time, such information or opinions are subject to change, are not offered as professional tax, insurance or legal advice, and may not be relied on as such. 
Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. 
The Private Bank at Commerce Trust is a business unit of Commerce Trust, a division of
Commerce Bank. 
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