On March 4, 2009, guidelines were released under President Barack Obama’s Making Home Affordable initiative, which is designed to help up to 9 million homeowners stay in their homes through refinanced mortgages or loan modifications.
What is a loan modification? Whether it’s called a loan modification, mortgage modification, restructuring, or workout plan, it’s when a borrower who is facing great financial hardship, having difficulty making their mortgage payments and is facing foreclosure, works with their lender to change the terms of their mortgage loan to make it affordable. The workout plan varies by lender, but changes could include temporary or permanent changes to the mortgage rate, term and monthly payment of the loan, the past due amount could be rolled into the loan, and the new balance re-amortized.
To qualify, you must:
Owe between 80-105% of your mortgage. One analysis shows that 26% of mortgage holders, or 14.8 million homeowners, currently qualify to refinance under these specifications. One quarter (24.6%) of homeowners with mortgages (14 million) do not qualify because they are underwater and owe more than 105% of their home’s value. This is especially true in hard-hit areas of California or Florida, where home values have fallen 40% or more since the peak.
Have a loan backed by Fannie Mae or Freddie Mac. Approximately 60% of single-family loans are backed by Fannie or Freddie, but a homeowner may not know this about their own loan. If you don’t know, call Fannie at 1-800-7FANNIE and Freddie at 1-800-FREDDIE or submit online forms with Fannie Mae and Freddie Mac.
Have a conforming loan. A conforming loan is a loan that is under $417,000 in many areas, or in high value areas, $729,500; ask your lender or Realtor® for the conforming loan rate in your area (up to $729,500 in Los Angeles). Even still, the median home value in Los Angeles, and in other high value areas, is substantially higher than the conforming limit.
Take this financialstability.gov Q&A to see if you qualify. If you don’t think you qualify for a refinance, you might qualify for a loan modification under the plan.
Refinance Loan Overview
You have an Adjustable Rate Mortgage (ARM) which was doing fine enough that you bragged about it but your loan is going to reset to a higher interest rate amidst market uncertainty and everyone is buzzing about it. Lying awake at night is interfering with your job, so you figure you’d better say goodbye to that low but fluctuating interest rate, and get a nice secure fixed-rate loan before the swing hits the sky.
This is a common scenario these days as interest rates inch up and many homeowners who opted for ARMs in the past 10 years are hoping to switch to a traditional loan.
Switching types of mortgages, as described above, is one reason people refinance, which is simply replacing a current mortgage with another. But there are others.
Reasons to Refinance
Lower your interest, but keep your term: When rates drop you want to take advantage of it and lower your monthly payments, but keep the length of your mortgage.
Take care of that balloon payment: You opted for a short-term ARM with a balloon payment and the due date is looming, so you have to come up with a longer-term loan.
Shorten your term: Lower interest rates (or an increase in your income) mean you can pay down your principal faster.
Credit rating change: Take advantage of an improved credit rating and get out from under that high rate you had to accept when you bought.
You need cash: In some cases, you can refinance for an amount more than what you still owe on your home. Lenders limit the Loan to Value ratio at no higher than 70 percent for this type of loan.
How Do I Get Refinance Quotes?
You can shop anonymously for mortgage rates for a refinance online. Remember, however, that there are reputable lenders and not-so-reputable lenders. My advice? I’ve said it before: SHOP FOR A BROKER, NOT A MORTGAGE. Ask for references from your Realtor® as well as friends and other borrowers. Your focus should shift from shopping the price of the mortgage to shopping for the best broker. The broker will shop the market for you. Brokers shop lenders far better than you can, among other reasons, because they are in constant contact with many lenders, and know the niches where your situation fits.
Read my blog posts about Loan Modifications and the Cost of Refinancing here.
If we can be of assistance with a refinancing referral, or to answer further questions, contact The Bremner Group at 310-571-1364.