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How Do Owners Refinance?

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Posted On: 05/09/2012

QUESTION:

In an earlier column you said that rather than walkaway from a property, an owner would be better off staying and refinancing. That sounds good, but lenders do not make loans to underwater borrowers, so how can an owner refinance?

ANSWER:

A decade ago there were few if any negative-equity loans. However, from roughly 2000 to 2008 lenders offered “high-LTV” – loan-to-value – financing equal to 110 percent, 115 percent and even more of a home’s value, loans which were underwater from Day One. Also, with option adjustable-rate mortgages, payments could be less than the cost of interest. The unpaid interest was then added to the loan amount, immediately increasing the size of the debt. According to Fitch Ratings, 94 percent of all option-ARM borrowers only made minimum monthly payments.

Negative-equity programs now are available to prevent foreclosure. As examples:

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The government’s Home Affordable Refinance Program refinancing plan was originally limited to those who were less than 125-percent underwater – you could have a home worth $200,000 with a $250,000 mortgage and still get refinanced. In October 2011, the 125-percent limit was dropped, opening the program to more hard-hit foreclosure centers, such as California, Florida, Nevada, Arizona and Michigan. This is the loan program to consider if you’re underwater.

In 2010, the FHA began offering a “short refi” program that was targeted “to help responsible homeowners who owe more on their mortgage than the value of their property.” In practice, there are convoluted requirements and fewer than 1,000 short-refis have been made since the program started.

Borrowers in states with high unemployment and equity losses of 20 percent or more may qualify for assistance under the government’s Hardest Hit Fund, including principal reductions, payment assistance and the elimination of second liens.

None of these programs are perfect but they do exist and they can help some borrowers who would otherwise be foreclosed. For specifics, speak with local lenders and state housing offices.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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