Will Refinancing Help You Keep Your Home?
Obama Plan Brings Hope to Struggling Homeowners
Feb 23, 2009
The Obama housing rescue plan, better known as the Homeowner Affordability and Stability Plan, is designed to help 9 million homeowners either refinance their current mortgage loans or prevent them form losing their homes to foreclosures, according to a recent story in The New York Times.
The rescue plan is not scheduled to go into effect until March 4, so much can change before a final version is announced, but the plan as of this writing included two main components. The plan would provide assistance to homeowners who have been making their loan payments on time but are struggling to do so. These owners may be unable to refinance their loans because they do not posses enough equity in their homes. Depending on when they purchased, these owners may be living in a home that is worth less today than what they originally borrowed to pay for it.
The second major component would provide incentives to mortgage lenders -- who are not required to participate in the housing plan -- to encourage them to alter the terms of the mortgage loans they made to homeowners who now face the possibility of losing their homes to foreclosure.
Will Refinancing Help Struggling Homeowners?
The hope is that more homeowners will now be able to refinance into mortgage loans that feature better terms. This is especially important for those homeowners who took out adjustable-rate mortgage loans during the housing boom.
These loans come with interest rates that are initially low. But after a set number of years, these loans adjust. The new monthly payments can be too high for many homeowners to pay. The theory, though, was that this wouldn't matter: Homeowners could simply refinance into fixed-rate loans once their adjustable loans neared their reset dates.
Today, though, this doesn't work. Housing prices have fallen across the country, according to the National Association of RealtorsThis means that many homeowners can't refinance because their homes are no longer valued highly enough.
The Obama housing plan aims to address this problem. And it may have a big impact on homeowners staring at a huge jump in their adjustable-rate mortgage payments.
But refinancing isn't always the answer for homeowners merely seeking a lower mortgage payment.
Reinancing isn't Free
The costs of refinancing may be high enough to make any savings not worth the hassle, especially to homeowners who are not in immediate danger of missing any mortgage payments. Borrowers can expect to pay from $2,500 to $5,000 in closing costs to refinance their mortgage loans.
Borrowers should also remember that a lower interest rate may not always bring as much savings as they expect. A homeowner with a $200,000 30-year fixed-rate mortgage loan with a 6.5 percent interest rate would have a monthly mortgage payment of $1,264.14.
If that same homeowner dropped the interest rate to 5.5 percent, the monthly payment would drop to $1,135.58. That's a monthly savings of just $128.56.
Individual borrowers will have to decide if such savings are worth the work of digging up paycheck stubs and tax information. They'd also have to decide if a refinance makes sense when closing costs are factored in.
Of course, this situation changes when borrowers are either missing mortgage payments or on the verge of doing so.
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