Ask Money

Mortgage help?

Chris Farrell Feb 26, 2009

Question: Hi Chris, I’m in more than a bit of a quandary…I purchased my home (townhouse) in 2005 and refinanced in 2006 (to get away from an frightful interest only mortgage to a traditional 30-yr fixed mortgage). While I live quite frugally, my mortgage is more than 60% of my income, and of course now my property value has tanked into what appears to be the abyss! I do also have a student loan that I’m paying off (great interest rate so I don’t want to mess with that), so between all my mandatory payments, I feel I have absolutely no wiggle room at all, and do feel more than stressed. Will this new stimulus package be able to help someone like me, i.e., can I take advantage of this package to do some thing about my mortgage? Thanks so much. Mini, Herndon, VA.

Answer: I don’t blame you for feeling stressed out. You’re paying out way too much of your income for shelter. Let’s hope the Administration’s housing plan does buy you some relief. Now, it seems to me that the mortgage refinancing portion of the plan is designed for people like you. You’re current on your payments. You have good credit, paying your bills on time. But you can’t refinance into today’s low rates because you don’t have enough equity in your home after the steep decline in home prices. The new rules allow Fannie Mae and Freddie Mac to refinance mortgages where the value of it is between 80% and 105% of the value of the property. Many borrowers that are making their mortgage payments on time have seen their loan-to-value ratios climb into this range because of falling house prices. However, this program is for “conforming” mortgages, ones that fall within the $417,000 loan limit of Fannie Mae and Freddie Mac. (There are higher loan limits for 59 high-priced sections of the country.)

That’s one avenue to pursue. There’s another tactic to consider, or at least explore. The loan modification part of the package is aimed at borrowers in imminent risk of default. That’s not you. But it has incentives for mortgage lenders and mortgage servicers to reduce monthly repayments to 31% of gross income–considerably less than you’re paying right now. (And the new loan modification plan is supposed to stop the practice of lenders loading up mortgage modifications with fees, penalties and the like so that the new arrangement is actually more expensive than the previous one. How’s that for disgusting?) I would at least try to see if you can get your loan modified. But if you do get an offer look carefully at the deal to make sure you come out ahead.

Hopefully, you will be able at least to refinance your mortgage at a lower rate.

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