This mortgage hack could save you thousands a year — and it’s not a refinance

With mortgage rates dropping to their lowest level since 2022 as the Federal Reserve begins a series of interest-rate cuts, homeowners with higher-rate mortgages are finally getting the chance to trim their monthly payments with a cheaper home loan. That has sparked a surge of interest in mortgage refinances.

But there’s another method for getting a lower mortgage rate. Some lenders — especially smaller banks and credit unions — are offering rate modifications as an alternative to conventional refinances that involve lower fees and less paperwork.

A rate modification, put simply, is an adjustment of the interest rate on a loan without changing the other terms, such as the time left on the mortgage. For borrowers, a rate modification is a way to reduce monthly payments and save money over the life of the mortgage. For lenders, it provides a tool to help retain creditworthy customers who will be shopping around for better deals at competing banks as borrowing money gets cheaper.

Unlike a mortgage refinance, a rate modification is not a new loan with a new term. It also typically involves lower fees than a refinance.

Lenders also offer something called a loan modification, which alters the loan to help distressed homeowners. Rate modifications, on the other hand, are aimed at retaining customers who are not necessarily facing financial hardship.

While rate modifications were more common in the 1980s when banks held loans in their portfolios, most mortgages are now sold into the secondary market, precluding lenders from simply adjusting the rate without a refinance, said Ron Haynie, senior vice president of mortgage-finance policy at the Independent Community Bankers of America, a trade group. Still, some lenders today do offer rate modifications if possible.

“You should, at a minimum … call your current lender and just ask them if they offer rate modifications,” said Brian Preston, a financial planner and certified public accountant, on a recent episode of his “Money Guy” podcast. The process may be the easiest at credit unions, he said: “I know for a fact that they’d rather keep your business than just watching it walk out the door.”

Smaller lenders and credit unions may be “more receptive” to offering rate modifications compared to big banks that have “millions and millions of borrowers.

“We believe the Fed’s expected rate cuts are likely to make mortgages more affordable, encouraging more home buyers and allowing current homeowners to refinance at better rates,” said Matt Vernon, Bank of America’s head of consumer lending.

Alex Elezaj, chief strategy officer at United Wholesale Mortgage, the largest U.S. home-mortgage lender, said rate modifications “could be just a marketing thing” or another name for refinancing a mortgage and rolling the fees into the new payment amount. “You really want to make sure you’re understanding the full scope of what it is,” he said. “It’s very beneficial to speak with a mortgage broker and really understand your current situation.”

Borrowers should resist paying any fees at all for a rate modification, said Ahmed, the Boston-area financial planner. His reasoning: “You have to prep the documents. Why are you charging me a fee?” Always negotiate, he added: “I’ve never even gone to Best Buy and bought a TV at full price.”

Even if the lender winds up refusing to waive fees for a rate modification, “you won’t know if your lender is willing to budge on fees until you ask,” LendingTree’s Channel said. “What’s more, they may not offer you the best possible deal until you ask.” Still, “odds are, you’ll probably need to pay at least something in fees when everything is all said and done.”