Rate-Improvement Mortgage

This is a specific type of fixed-rate mortgage that allows the borrower a one-time chance to reduce the interest rate early in the loan period without having to incur the expenses of refinancing. This type of mortgage protects the borrower in the event that interests rates fall lower than the initial rate. There is typically a fee associated with this option, and the lender typically has the true cost of the option somewhere else in the loan package. An example would be if the borrower had a 6 percent fixed-rate on a 30 year loan. Five years into the loan, assuming rates had dropped, the borrower could exercise the rate reduction option to get the rate dropped to 5.8 percent without the need to refinance. The remainder of the loan would be 5.8 percent fixed-rate for the following 25 years. Although the borrower paid for this option, there is a possibility that the reduced rate could save money over time.