Skipping payments to get a mortgage modification is not a good idea

A nasty rumor is floating around that people should skip a few mortgage payments to get a better interest rate on their mortgage. While it's possible if you happen to have your mortgage with a bank under the new Fannie and Freddie program, you can't count on help.

When you stop making mortgage payments your credit rating will go down dramatically, impacting all of your loans and credit card rates.

Here's a question from a reader on the topic:

I want to refinance my mortgage to a lower rate now that they have dropped. When I checked with the lender that carries my loan now, they sent the "good faith estimate" with all the info. If I stay with my current lender, why do they need to do all the things that seem to cost a lot of money, such as credit check, appraisal, title search etc. since I am already in their system, we built the house, so nothing changed regarding ownership and our mortgage has been paid on time every month. I have history with this bank, shouldn't that be enough to ask for a lower interest rate?

Someone told me to not do anything, skip a couple of mortgage payments, then contact the bank saying I'm having trouble and worried about foreclosure. Then they will do what they're doing with many of the other people that are struggling to pay, and just lower the interest without all the other fees.

Is this really how the banks are keeping people in their homes? And, is there a way I can do a refinance properly but avoid some of the fees that seem unnecessary?

Since this reader has a good credit history with the lender, he would be better off protecting that credit history, which puts him in a good competitive place. What I've done in the past to get the best refinance rates is to use a service like Lending Tree. I applied online, had five mortgage companies bid for my business and I took the best offer.

The best offer came from my current lender, but I didn't get that offer until after the lender saw I was looking around. I refinanced with my current lender at 4.5%. In today's economy, lenders don't want to lose good customers. But, if you want them to bid for your business you have to show them that others want the business.

You may find another lender makes a better offer that your current lender won't match. But does that matter? You just want the lowest interest rate.

The reason most lenders can't just modify a mortgage to a lower rate is that each mortgage is owned by an investor who won't likely accept the lower rate, which means you must actually refinance to a new loan. Under the strict guidelines today there are no loans written as "no doc" loans. Those types of terms just don't exist in the current financial crisis. All mortgages must include full documentation. Also, appraisals and credit checks are good for only three months. A lot can change in this volatile financial market, so it's unlikely a lender can reuse older appraisals and credit checks. Your job may be the same, but is your salary? You'll need to prove your current salary history.

Generally, I recommend that one considers a refinance whenever they can lower the mortgage interest rate by at least 1%. I also recommend that one looks for terms with no points to keep the refinance costs low. As part of my recent refinance I did get my lender to agree to waive some refinance costs because I'd been working with them for 20 years, so it never hurts to ask.

I can guarantee you that you will be sorry for many years to come if you choose to stop paying on your mortgage. Even if you save your house and get a lower interest rate, you will be placing a negative mark on your credit report that will stay there for at least seven years. Once your credit card companies see that you stopped paying your mortgage they will likely raise your credit card interest rates -- often to rates as high as 29 or 30%. You'll pay dearly to get that special mortgage deal, and it's not worth the cost.

Lita Epstein has written more than 25 books including the "Complete Idiot's Guide to Improving Your Credit Score."
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