The Federal government has launched a number of programs to stop foreclosures, that have become rampant after the collapse of the housing market. Some of these programs are meant to help homeowners modify mortgage payments, while others help homeowners refinance their home. In addition to modifying mortgage payments and aiding mortgage refinancing, the Obama administration is also trying to provide relief to homeowners, who are unable to make the necessary mortgage payments, by encouraging lenders to allow short sales.
Mortgage refinancing refers to the process of replacing a mortgage loan with another mortgage of the same size having relatively favorable repayment terms. Of course, mortgage refinancing is possible only if one has positive built-up equity in the house.
Home Affordable Refinance Program
People whose loans are owned or guaranteed by Freddie Mac or Fannie Mae, have the option of refinancing their mortgage from an adjustable-rate mortgage (ARM) to a low fixed rate loan. In fact, they may be able to replace their current mortgage with one that demands interest only payments or balloon payments. The new mortgage loan that is provided under HARP (Home Affordable Refinance Program) cannot exceed 125% of the current market value of the property.
HOPE for Homeowners Program
The HOPE for Homeowners Program was launched on October 1, 2008. This program is meant for homeowners whose loans are insured by the FHA (Federal Housing Administration). It can help refinance their mortgage even if the built-up home equity is less than 20%.
Bad Credit Mortgage Refinance
Those whose loans are not owned or guaranteed by Freddie Mac or Fannie Mae or individuals who do not have FHA insured loans, may consider approaching a mortgage broker, who may be willing to provide a new mortgage loan to replace the current mortgage, provided they have sufficient built-up equity in the house. However, the borrower may be forced to pay a high rate of interest on the loan, and this may very well defeat the purpose of mortgage refinancing. Moreover, mortgage brokers may also expect the borrower to purchase points, wherein, the cost to purchase one point is equal to 1% of the total principal amount of the loan. Although purchasing points will lower interest rates, the Internal Revenue Service (IRS) considers points as prepaid interest, which has to be deducted over the term of the loan rather than at the time of closing. Again, the borrower would be required to pay closing costs that are rather steep to refinance the mortgage. A cash strapped borrower who is not eligible for refinance under HARP or HOPE, may be unable to afford mortgage refinancing due to the aforementioned reasons.
It's evident that mortgage refinancing may help prevent foreclosures. The best way to obtain a mortgage after foreclosure is to improve credit scores that may fall by up to 350 points as a consequence of a foreclosure.