“Can I reduce my mortgage? I’m out of work and I have no equity in the house.” This was a question our friend Kathy asked me not long ago. She was in serious financial trouble. She asked me how to get her mortgage loan modified and/or how to reduce her mortgage payments.
Her situation is not unique; she’s a single mom who owes more on her home than it’s worth. When she bought it, she could afford the payments, but now her income is way down and she can’t afford the monthly nut.
She called the bank and explained her situation. She told them that she didn’t want to walk away from the property, but she needed some help. All she wanted to do was refinance to a more reasonable interest rate. The bank transferred her from one department to the next with no result. Surprised?
Some of her friends told her to stop making payments on her home. That would get the bank to wake up, they said.
Others cautioned her against this strategy. What would you do in this situation?
I did some digging and looked into the “Making Home Affordable” program rolled out by our benevolent government. It seems like this program is tailor-made for Kathy. It’s designed to help those who are unable to refinance their homes and lower their interest rate expense because they have no equity in the property.
There are two programs, really. The first is “HARP,” which is for loans owned or guaranteed by Fannie Mae and Freddie Mac. “FHA Hope for Homeowners” is the second and can be used for any type of loan.
To take advantage of the programs, you must be current on your mortgage payments and the balance of the first mortgage can’t exceed 125% of the current market value. Also, you must be deemed able to make the new monthly payments.
If you do qualify, the new rate is based on market rates at the time of the refinance. In Kathy’s case, this would make her home affordable.
All Kathy had to do was call her mortgage holder and ask for a Home Affordable Refinance application or use any Fannie Mae or Freddie Mac approved lender. (Almost all major banks are approved.)
To quality, the original loan must have been created on or before 1/1/09 and the principal balance must be equal or less than $729,750 for single family homes. Also, you must occupy the property as a primary residence. Finally, you must have a financial hardship that you can document. One measure is if your monthly mortgage payment is more than 31% of your monthly gross income.
This program expires June 10, 2010, so I suggested that Kathy try to get the ball rolling as soon as she can. Many people are aware of the program, but not many realize the clock is ticking.
If you were Kathy, would you try to qualify for these programs? What else should she do?
Nunzio Bruno says
That is some great digging Neal! Those are some great programs that people don’t really hear about until they are too behind to qualify for them. Way to bring it to the forefront and out line them the way you did.
I’d like to share what we did to lower our mortgage payments… Unfortunately this won’t apply to your friend, but it may help others who would like to safeguard themselves from this situation. We had faithfully prepaid our mortgage by making almost double payments over several years (some years more some years less depending on our childcare costs). When we finally decided to stop prepaying the mortgage, we were 80k ahead of where we would have been had we made normal payments. We have a fixed rate 30 year mortgage.
What we were able to do is called a “recast” where they take the existing owed and reamortize it for the remaining term. So if you now owe 100K for a remaining 20 years, they will respread that out and lower your payment significantly. We reduced our mortgage payment by 70% by doing this and removing escrow. Basically for every $1000 we used to pay, we now pay $300!!! Also, removing the escrow is important because uncle sam won’t reposses your property, he’ll only place a lien. Not a good situation to be in either way, but at least there’s still a roof over your head.
We paid $250 for the recast to be done.
Neal@Wealth Pilgrim says
Sounds good. Do all banks offer this? Also, I imagine it didn’t impact your credit…am I right?
I actually refinanced under the HARP program because it allowed us to refinance without taking on private mortgage insurance because our home’s loan to value ratio was no longer 80/20. We ended up shaving just over 1% off our our APR.
We got the run around with the bank and nobody seemed to know about the program until we got a hold of one broker who knew what he was talking about and was able to get our refinance done in a couple of weeks instead of months. So I think it’s key to find the right person at the bank, and if you’re lucky you might be able to do a refinance. Good luck!
Neal@Wealth Pilgrim says
How did the refi under HARP impact your credit score?
I don’t think it impacted our credit at all really. Although a refinance under the program versus getting a modification will probably have different credit score ramifications