125% Refi's Announced! The Government Finally Gets it

The government appears to be finally understanding how many Americans are upside down in their homes.

The FHFA just announced today that they will be allowing FNMA & FHLMC to refi underwater homeowners up to 125% of their property's value.

Previously the cap was at a joke amount of 105% LTV, resulting in President Obama's hyped Home Affordable & Stability Plan being way behind on the estimated number of homeowners it was meant to help.

The program provides borrowers with an incentive to reduce the term of their loan from 30 years to a shorter-term, fixed-rate mortgage and therefore pay down the principal more quickly and reduce lifetime interest payments. Borrowers who refinance may see lower monthly payments and a more sustainable mortgage which will reduce the risk of default. This expansion of HARP will assist the Enterprises in managing the credit risk associated with these higher loan-to-value mortgages.

If your loan is held by Fannie Mae or Freddie Mac and you are current on your mortgage payments, you may be eligible to refinance your mortgage loan even if your LTV is up to 125%. LTV, or loan-to-value-ratio, is a measurement that compares the principal balance of your loan (the amount you currently owe) to the actual value of the house. For example, if your loan amount is $300,000 and the current value of your home is $240,000, your LTV is 300/240, or 125%.

Previously, under the Making Home Affordable Program for Fannie Mae and Freddie Mac loans, only homeowners seeking loans with a maximum LTV of 105% were able to refinance. The eligibility guidelines for refinancing have recently been expanded to allow more homeowners to participate. Now borrowers with LTVs up to 125% can take advantage of lower interest rates to lower their monthly payment or take the opportunity to move into a fixed-rate mortgage.

Refinancing to a lower interest rate will usually result in a lower monthly payment. Alternatively, if you can afford your current monthly payment, you may consider using the savings to get “above water” much quicker. It may be right for some homeowners to pay off their mortgage in less than the typical 30 years – which means building equity faster and paying less interest over the life of the loan.

If you refinance into a 20-year or 25-year fixed-rate mortgage loan, just like the standard 30-year mortgage, your total principal and interest payment will never change. Your monthly payment will be a little higher than with a traditional fixed-rate 30-year mortgage due to the shorter term. Ask your lender about this option – if you can commit to making slightly larger monthly payments, which may still be less than your current payment.