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Posted On: 07/30/2008

Q: I now have an adjustable-rate mortgage. I've been offered a loan modification with a fixed rate for three years. However, at the end of the three-year period the rate will begin adjusting again. Can I refinance at the end of the three-year period and shop for a fixed rate or will I have to wait a certain amount of time?

A: There are different ways to modify a mortgage and your lender would not take such a step unless you had demonstrated that the current arrangement will lead to foreclosure -- and a loss for the lender.

Traditionally, borrowers have been able to refinance loans at any time. However, in recent years lenders have created stiff prepayment penalties to discourage refinancing during the first few years of the mortgage term. With this brief background in mind, several points stand out:

First, the lender's offer is better than the alternative, foreclosure now and the loss of your home. Even though the lender is plainly working in its best interest, in this case it is also taking a step which can be enormously helpful to you. Many lenders are not offering modifications.

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Second, you should do everything possible to re-establish credit and bulk-up savings. Three years is not that far away.

Third, what is the new interest rate? New payment? Is there a prepayment penalty during the modification period. If so, how much?

Fourth, if at all possible do not wait three years to refinance. Instead, look for a fixed-rate loan, perhaps something insured by the FHA.

Fifth, also look into selling the property and moving to a home with lower monthly costs. If you can do this when not facing foreclosure your negotiating position will be much stronger.

Your lender has given you a window of opportunity. Since a lender does not have to offer a modification you should take advantage of the situation you're got.

Q: I owe way more than my house is worth. I don't think refinancing is even an option for me right now, so I'm planning to move to a rental.

Is there any option left for me? I can barely make the monthly payment. I reached out to the lender to see if we could work anything out but got no response. My payment is scheduled to go up by $200. I am just anxious. How I am going to make payments. I don't want to be foreclosed. What can I do?

A: Although your situation looks dire, you actually have a number of options. The good news here is that while it's tough, you're making your mortgage payments and maintaining your credit. To the world, your credit is solid -- it's once you have a late or missed payment that problems arise.

What to do? Speak with local brokers to see if the home can be sold with a "short sale." Your lender would have to approve of such an arrangement -- and approval will not be easy to get.

If a short sale is not reasonable then the next step is to get more money. This may mean a second job, taking in a boarder (check with local college housing offices) and cutting expenses (trading in a high-cost car for something safe and less expensive).

Q: I'm trying to refinance my mortgage. My lender informed me that I would need to use their appraiser at a cost of $400. I told them I could get it cheaper. They informed me that I don't have a choice if I wanted to refinance. What can I do about this?

A: At first it may seem as if the lender is being abusive in this situation, but actually the lender has a point.

From the lender's perspective -- and remember it's the lender who is putting up the cash - the issue is one of risk: The lender wants to make sure that the property has enough value to support the loan in case there's a foreclosure and the property must be sold at auction.

So, while it is true that you may be able to find a less-expensive appraiser, what the lender wants is an appraiser who can provide a conservative, independent valuation of the property. In other words, an appraiser the lender knows and trusts.

The party who must be satisfied is the lender. No lender is going to accept a valuation from an individual it does not know, even if that individual is a licensed appraiser.

Turn this around. Imagine that you were asked to lend money to someone you didn't know. Would you use a valuation from an appraiser they selected?

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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