The Obama administration brought out it's Home Affordable Refinance Plan which allows homeowners to refinance their Fannie Mae or Freddie Mac loans even if their home has lost value.
Initially, the maximum Loan To Value (LTV) was 95% of the appraisal. It then moved up to 105% and the latest increase allows up to 125% of the homes value to be borrowed.
One of my clients took advantage of the initial maximum of 95% at an extremely attractive rate.
I have asked Fannie Mae how many borrowers have been able to refi utilizing the program, but, they do not make that information available.
I don't understand the logic of allowing up to 125% of the value of one's home to be financed.
Let's say a home is worth $400,000 today, however, the mortgage is for $490,000. You could actually do a $500,000 refinance, including your closing costs as long as their is a benefit to you. The benefit most often would come from receiving a lower rate than on your existing loan.
In 10 years, you would have paid down the loan to about $413,000. If house prices stay the same for let's say 3 years and then rise at an average rate of 3% for the other 7 years the house would be worth about $492,000. Therefore you would have an equity stake of about $79,000.
The downside is that you would need to stay in the home for 10 years after which you might just break even if you sold it.
Americans are a transient bunch and move roughly every 5 to 7 years. This plan would create an anchor for those who refi using it, or a potential loss to the lender when they sell and can't cover the mortgage.
I will watch with great interest to see the HARP play itself out.
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