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Changes to Modification Interest Rate & Payment

Mortgage modifications help make your payments more manageable and affordable. Many times this is done by reducing the interest rate significantly. If you have a modification with a step rate feature, the initial modified interest rate is temporary (usually fixed for 5 years). After the initial period, your rate will begin to adjust, or “step up” to a pre-determined interest rate, also referred to as an interest rate cap. Click the tabs below to learn more.

IMPORTANT: If your loan was modified about five years ago your interest rate and monthly payment amount may be changing soon! Your mortgage company should notify you about this change, but you should call them immediately with any questions or concerns.

Homeowners with modified mortgages that have step rate features will experience changes in their interest rate and monthly payment after a certain period of time, typically five years. The step rate feature will gradually increase the interest rate (usually no more than 1 percentage point per year), which will also change the monthly payment amount.

Prepare yourself by reviewing documentation from your mortgage company to understand the specific details of your loan modification. Pay close attention to any changes noted for your interest rate, the payment amount, and the date the changes will take effect. If you use an electronic payment method to pay your mortgage, be sure to update it to the new payment amount before the due date.

If you're concerned—or anticipate challenges—with a new monthly payment, your mortgage company can review your options with you. The options include continuing to pay according to the terms of your loan modification agreement, or perhaps refinancing through programs like the government's Home Affordable Refinance Program (HARP) to lock-in an interest rate.

The sooner you take action, the more options you may have. Get started by contacting:

  • Your mortgage company to review the changes to your modification and discuss payment options;
  • The Homeowners HOPE™ Hotline (1-888-995-HOPE) to speak with a housing expert about your situation and an action plan;
  • A HUD-approved housing counseling agency (www.HUD.gov) for financial and budgeting assistance, and to find an approved housing counselor; or
  • The Fannie Mae Mortgage Help Network for additional mortgage assistance programs, if your mortgage is owned by Fannie Mae.

What is an interest rate adjustment and why is it adjusting?

If your mortgage was modified with a step rate feature your interest rate was reduced below the prevailing market rate at the time your loan was modified. After a certain period of time (usually 5 years), your interest rate will begin to adjust, or step up, based on the terms of your modification agreement. It will continue to adjust (usually no more than 1 percentage point) each year until it reaches the interest rate cap*. The cap is not your original mortgage interest rate, but the market rate at the time you received your modification.

*The interest rate cap for a Fannie Mae HAMP modification was based on the Freddie Mac Weekly Primary Mortgage Market Survey® (PMMS®) Rate for 30-year fixed-rate conforming mortgage loans, rounded to the nearest 0.125%, as of the date that your modification agreement was prepared.

What’s changing?

With a step rate, your interest rate will increase each year (which will change your monthly payment) until your modified loan reaches its interest rate cap. After that, your rate will be fixed for the remaining life of the loan.

How does the adjustment work?

Let’s use a simple example to illustrate how this works on a loan modification scheduled to reset this year. Assume the loan was modified five years ago and the rate was fixed during that five-year period. This is an example only—your loan terms will be different.

Example:

  • The current modification interest rate is 3%.
  • The interest rate cap is 5.125% (as defined above).
  • The loan—according to the modification agreement—adjusts by a maximum of 1 percentage point every year until it reaches the interest rate cap. Therefore, the interest rate on the loan will:
    • Adjust 1 percentage point this year to 4%.
    • Adjust 1 percentage point next year to 5%.
    • Adjust 0.125% percentage point the following year to 5.125%.
    • Remain fixed at 5.125% for the remaining term of the loan (since 5.125% is the interest rate cap, this would be the final interest rate adjustment).

What will my interest rate and monthly payment adjust to?

Several months before an adjustment happens, your mortgage company will send you a letter(s) with specific details about the step rate adjustment, your new interest rate, and new payment amount. If your loan was modified about five years ago, contact them immediately if you have not received a letter and/or would like to discuss your payment information with them.

Do I need to do anything?

Once you receive a letter or talk with your mortgage company about the upcoming changes, pay close attention to the date your new payment amount is due. Be sure to pay the new amount by the due date to keep your loan from being past due and from being charged a late fee. If you use an electronic payment method to pay your mortgage, make sure to update it to the new amount before the due date.

I’m concerned about a new monthly payment, what options are available?

If you anticipate difficulty making your mortgage payment or just need some tips on how to plan for the change, contact your mortgage company right away to review your options. You can also call the Homeowners HOPE™ Hotline (1-888-995-HOPE) to speak with a housing expert about your situation and an action plan. Additionally, free financial and budgeting assistance with a housing counselor is available to you through a HUD-Approved Housing Counseling Agency (www.HUD.gov). To get help from the Fannie Mae Mortgage Help Network, click here.

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