Month: April 2009

The Homeowner Affordability and Stability Plan unveiled in February is a great start to getting millions of responsible borrowers into mortgages that they can afford.  The plan addresses borrowers who either have less than 20% equity in their homes due to declining property values, or are employed but have had a recent decline in income.

The Basics

The plan is actually two plans. The first part helps employed homeowners who have made their house payments on time and want to refinance to a lower interest rate, but are unable to do so under current lending guidelines.

Lenders will modify the terms of the loan, for five years, and forego some of the equity requirements that keep many borrowers from obtaining the lowest available rates.

This rate reduction will be funded by a combination of TARP funds, and  by Fannie Mae and Freddie Mac, and would bring down mortgage payments to 31% of the gross income of the borrowers. The plan applies only to primary residences, excluding second homes and investment properties.

The second part of the plan addresses homeowners considered at-risk – perhaps from a decrease in income – and seeks to identify these borrowers before they default on their payments.

The Challenges

Issues that have been facing lenders since the implementation of the program include being able to handle the number of borrowers inquiring about the modification programs.

Issues facing borrowers include being severely upside down in their mortgages.

Borrowers who bought or refinanced a home at 100% equity several years ago and now have seen their property values fall 20% would either need to fund the difference to get them back to at least 105% or wait until the property appreciated in value.

With mortgage rates at near historic lows, you might be asking yourself if now is the right time to refinance. This is a very good question. Several factors will determine what might make this worthwhile. They are:

• How much will my payment and/or rate decrease?
• How much will the refinance cost, and who will be paying for it?
• How long do I plan on staying in the property?

Larger loan amounts will yield greater savings per month over smaller loan amounts with a given rate change, but even then care should be taken to make sure the transaction is in the borrower’s best interest.  For example, a homeowner with a $200,000, 30-year fixed rate mortgage at 6% interest is currently paying $1,199.10 per month in principal and interest. Should that borrower find a lender offering a refinance rate of 5.5%, that payment would drop to $1,135.58, creating a difference of $63.52 per month.

With the typical refinance transaction costing about $1,800, the recapture period of the expense of doing this works out to $1,800/$63.52, or about 28 months.  If the homeowner were to sell the property or refinance it within that time period, the expense incurred would amount to more than the benefit.

The positive side to this example is that if the homeowner were to stay in the property for 10 years after the refinance, the payment difference, $63.52 for 120 months, would equal $7,622.40 which, less the $1,800, gives the borrower a net benefit of $5,822.