Loan Modification Plan Announced

New mortgage loan modification program promises borrowers help with keeping up with their mortgage payments.

By Marcie Geffner – LendingTree.com

The U.S. Treasury has announced important details of President Obama’s new housing rescue plan, which includes both a loan modification program to help homeowners who can’t afford their mortgage payments and a refinancing program to help homeowners who have little or no equity in their home. (Read more about the refinancing program.)

The loan modification plan, now called Making Home Affordable, is intended to help borrowers who are at risk of default or foreclosure because they’ve suffered a loss of income or a rise in household expenses such that they can no longer afford their mortgage payments.

Who may qualify for loan modification plan
The loan modification plan is intended to help homeowners who can demonstrate that they are at risk of being unable to make their mortgage payments due to a financial hardship. This applies to both borrowers who have already missed a mortgage payment and those who are not yet delinquent.

The plan is open to borrowers who obtained their mortgage before Jan. 1, 2009, occupy their home as their principal residence and can provide paycheck stubs and tax returns to document their income.

How loan modification plan can help
The loan modification plan offers incentives to encourage lenders and loan servicers to help borrowers by modifying their loans. A loan modification is not a refinance, but rather a change to the terms of the loan.

Here’s how the loan modification plan works:

• The borrower contacts his or her lender or loan servicer to find out whether he or she qualifies for a loan modification.
• If the borrower is qualified, the lender will reduce the interest rate on the borrower’s mortgage so the monthly payments will be less than 38 percent of his or her income.
• The lender then cuts the interest rate further so the monthly payments will fall to only 31 percent of the borrower’s income. The cost of this second rate reduction is shared between the lender and the federal government.
• The lender also may lower the borrower’s payments by reducing the amount the borrower owes, extending the loan term to 40 years or restructuring the loan so no interest is charged on part of the loan balance.
• The government may reward borrowers with an additional $1,000 per year applied to their mortgage if they keep up their payments after their loan is modified.

The lower interest rate typically will last five years, after which the rate can be increased. Other modifications may last five years or be made permanent, depending on the borrower’s situation.

To find out whether you can take advantage of this program, call your loan servicer or use the self-assessment guide on FinancialStability.gov, a new government-run website about these programs. Your loan servicer’s name and telephone number should be on your monthly mortgage statement or payment coupon.

Homeowners may have other options
If you don’t qualify for the loan modification plan, you may be able to take advantage of the new refinancing program. This program is open to homeowners who have a solid mortgage payment history and whose mortgage is owned or guaranteed by Fannie Mae or Freddie Mac. The program lets these homeowners refinance up to 105 percent of their home’s current value.

If your situation doesn’t fit either the loan modification program or the refinancing program, you may still be able to lower your monthly mortgage payments by refinancing to take advantage of today’s low mortgage interest rates. Home buyers who haven’t owned a home in the last three years may be able to qualify for an affordable fixed-rate mortgage and an $8,000 federal tax credit.

How to compare mortgage loans

Comparing mortgage loans is one of the most important things you can do when you’re buying a home. The decisions you make will determine the size of your monthly payments, how much you pay upfront, and how much interest you’ll pay over the life of the loan.

You might find it simpler to compare loans if you ask each lender a series of questions, including:

• What is the loan’s interest rate?
• Will I be charged points?
• What are the closing costs and all other fees?
• What is the annual percentage rate, or APR – the rate you’ll pay per year for all the costs associated with the loan?
• Is there a pre-payment penalty?
• How is the loan amortized, meaning how quickly is the principal paid off?

Find out the answers to these questions no matter what type of loan you’re considering. Each can affect the overall cost of your loan.

If you are considering an adjustable-rate mortgage, or ARM, you can compare loans by asking:

• When does the rate adjust?
• How often does the rate adjust?
• Is there a cap limiting the amount by which the rate can adjust? What would my monthly payments be if my interest rate hit that cap?
• What is the index and margin that will determine my rate? How has the index changed over time?

ARMs are inherently more risky than fixed-rate mortgages because you’re gambling on whether interest rates will go up or go down before your rate adjusts. Understanding the best- and worst-case scenarios can help you weigh the pros and cons as you compare loans.

But there’s one other big question to consider before you get an ARM:

• How does the discount introductory rate compare with rates for 30-year fixed-rate loans?

If there’s not much difference when you compare the two, the fixed-rate loan might be a safer bet. You won’t save much in the short-term, and could save a lot over the long term. Plus, you reduce your risk if interest rates shoot up and you can’t refinance before the rate adjustment.

Finally, to truly compare loans, you have to ask yourself some questions:

• How long do I expect to stay in my home?
• Are my job and income secure over the long term?
• Will I be able to afford higher payments in the future?
• How comfortable am I with risk?

In the end, the best loan is the one that works for your needs.