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Any Relief for a Bad Rate?

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Posted On: 09/17/2008

Q: I would like to know if I can get help lowering the interest rate for my mortgage. I have two loans. My first loan is a 30-year, adjustable-rate mortgage with a rate of 5.875 percent fixed for five years, interest-only. My second loan is a conventional regular balloon loan with a 9.875 percent rate fixed for 15 years.

A: Let’s say you borrowed $400,000 at 5.875 percent. On an interest-only basis your monthly payment for principal and interest will be $1,958. After five years – if the interest rate does not change – the payment will increase to $2,547. If the interest rate rises to 7 percent, then the monthly payment will increase to $2,827 – taxes and insurance are extra in all cases.

With an interest-only loan, once the five-year start period ends you effectively have a 25-year mortgage. Less time to repay the loan means higher monthly payments, even if the interest rate remains steady.

As to the second loan, what are the exact terms? It has payments based on a 15-year amortization schedule, but if it also has a balloon payment does that mean the actual loan term is shorter, say five or 10 years?

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It would be great if you could refinance, but the odds are against it. Why? You have piggyback financing. You bought with two loans and little or nothing down. Now, in most areas of the country, the value of your property is less than your total loan balances. If you sell you will either have to bring cash to closing or get the lenders to agree to a short sale.

The first lender might agree to a short sale if it was not going to take a loss. But the second lender? The second lender may lose all of its loan in a short sale or a foreclosure so why should it help?

What about a rate reduction? Unlikely. The first loan already has a below-market rate – if anything the rate should be higher, thus a rate modification with the first lender is improbable. As to the second lender, it has a high-risk loan. It should get a higher rate for more risk.

What else can you do? Here are some strategies to consider:

• You or your attorney should contact the first lender. They may be able to give you a modification, perhaps extending the start period for one to three years or adding your unpaid payments to the end of the loan.

• You or your attorney should contact the second lender. Is it a balloon note? Would the lender agree to a longer term, say from 15 years? That would keep the current interest rate and payment but stave off foreclosure. In practice, the loan will likely be paid off in much less time.

• Ask yourself: Can you offset your costs by renting the property? Taking in boarders? Working several part-time jobs?

• Look into the HOPE for Homeowners Act of 2008 that was passed as part of the FHA reform package over the summer.

Under this program, the FHA can refinance some toxic loans. However, the new loan cannot be more than 90 percent of the property’s appraised value – which means your current lenders must be willing to take a loss. They must also be willing to waive all prepayment penalties as well as outstanding fees and charges.

To qualify for a HOPE loan your current mortgage must absorb at least 31 percent of your income. Under the program you will pay a 3-percent up-front mortgage insurance premium plus an annual premium of 1.5 percent, paid out monthly.

If you sell the property after having refinanced with a HOPE loan you must then equity share with Uncle Sam. In year one the government gets 100 percent of any appreciation, in year two the government gets 90 percent, in year three the government’s share drops to 70 percent, in year four Uncle Sam is down to 60 percent and in year five and thereafter the government gets half of any appreciation when the property is sold.

Why is Uncle Sam demanding an equity interest when a property is refinanced under the HOPE loan program? There’s a lot of risk refinancing distressed borrowers. The FHA is an insurance program and needs to get back as much of the money it can because some borrowers will inevitably default. In effect, HOPE loans are a costly form of refinancing – but less costly than a foreclosure.

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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