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Loan Modification or Refinance – Cautiously Choose One

Loan Modification or Refinance — Back in February 2009, the Obama Administration created a “stimulus” plan to help struggling homeowners survive in this immeasurable housing crisis. This “stimulus” is commonly known as the Making Home Affordable Program. Unfortunately, many people think that the stimulus only helps those whom cannot pay their mortgages or have missed mortgage payments in the pass.  This is not true.

Two main programs were set up to help “homeowners” — homeowner, a oxymoron, at best.  The first program is called the Home Affordable Modification Program and the second is the Home Affordable Refinace Program. The list of all of their programs is listed on the site, MakingHomeAffordable.gov.

According to their website,

The Home Affordable Modification says:

If you can no longer afford to make your monthly loan payments, you may qualify for a loan modification to make your monthly mortgage payment more affordable.

The Home Affordable Refinance says:

If you are a homeowner who is current on your mortgage payments but unable to refinance to a lower interest rate because your home value has decreased, you may be able to refinance.

Both programs are initiated through the homeowner’s mortgage lender, and the homeowner’s loans need to held by either Freddie Mac or Fannie Mae.  To determine if Freddie Mac or Fannie holds your loan, one would click on the Loan Look Up tap on the website and follow the directions there.

One should be aware, however, that the reduced rate that will be offered by the lender, assuming that one’s situation qualifies, will not be the extremely low rates seen in the media–each lender has a rate for which they will offer, i.e. 5.5% on a 30 year fixed as opposed to the 4.0% that can be had by a newly mortgaged 30 year fixed conventional loan today.  Also, the program, as told by my lender, only allows a refinance into a 30 year mortgage.

So how does this program help us, but also prevent wealth at the same time?

On the one hand, if a homeowner purchased their mortgage four years ago, and locked in a rate of 6.5%, the new rate through this program would offer him or her something around 1% lower — around 5.5%.  This can amount to big savings, depending on one’s current principal balance.

However, on the other hand, the five years or more that a homeowner has paid into their mortgage, will now be reset to a 30 year loan.  So, although one had only 25 years remaining on their mortgage, they will once again owe 30 years worth of payments.

If the program allowed for a 15 year refinance, I’ll recommend it in a heart beat.  Or if the program allowed someone to actually take advantage of the extremely low rates available today, such as the 4.0% on a 30 year fixed mortgage–although I only endorse the 15 year fixed or less–then I’ll at least consider it, despite it not being a 15 year mortgage.

But in any case, if you’re struggling with your home mortgage, refinancing to a 15 year fixed rate or keeping your current high fixed rate is probably the furthest thing from your mind.

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