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Want to Refinance Your Mortgage? Home Loan-to-Value Ratio May Climb to 125 Percent

BREAKING NEWS JULY 1, 2009: FHFA just issued a press release announcing that homeowners would be able to refinance their mortgages up to the 125 percent LTV level.

Want to refinance your mortgage? If you wanted to qualify for a Fannie Mae or Freddie Mac mortgage, you needed to have at least 20 percent equity in your home. But with home values dropping dramatically over the past 18 months, it's getting tough to find homeowners who have any equity in their properties at all.

In fact, one-third of all homeowners are underwater with their mortgages - meaning that they owe more than their homes are worth.

If you owe more than your home is worth, you can't refinance your mortgage to take advantage of today's close-to-jaw-dropping mortgage interest rates. Or, at least you couldn't until the federal government took over Fannie Mae and Freddie Mac, and then asked mortgage lenders to refinance home loans that were up to 105 percent of the value of the home.

In other words, if your house was worth $100,000, and you owed $105,000, you could still refinance your mortgage.

The problem is so many homeowners today are much farther underwater with their mortgages that they can't take advantage of interest rates that are near 50-year lows.

Last week in Washington, D.C., Federal Housing Finance Administration director James Lockhart admitted that the Making Home Affordable refinancing program could be more aggressive. When asked how high the loan-to-value ratio could go, Lockhart said his team was looking at raising it to 125 percent.

That means if your house is worth $100,000 but you owe $125,000, you could still refinance your mortgage to take advantage of lower interest rates - provided you qualified for the loan.

That's a very signficant difference and it will allow millions of homeowners to refinance their mortgages who currently cannot. The 125 percent loan-to-value ratio hasn't been finalized, but Lockhart said several times that the government has to finalize the loan modification and loan refinancing programs so that mortgage lenders can develop the necessary software, train their people and get moving.

"There are different alternatives and ideas being floated around. We want to concentrate people around one idea and go for the refinancing or loan modification. What we don't want is for people to wait for the next best program. We did the streamline loan modification program and since there were rumors a better program was coming, we had no takers for that program."
Well, who wouldn't want to wait for a better program? Throughout the housing crisis, there's been one better program after another. If you bought a house in 2008, you only got a $7,500 tax credit that you had to pay back in $500 annual installments over 15 years. If you buy this year, you get an $8,000 tax credit that you don't have to pay back, ever, and you're even permitted to use it for your closing costs and down payment above 3.5 percent with an FHA loan. Now, there's talk about making it a $15,000 refundable tax credit.

Lesson learned? It's worth waiting for the next great program that will stabilize the housing market.

Lockhart said another big problem is that a lot of homeowners aren't answering their phones or reading their mail. That's the benefit of (or problem with, depending on your perspective) Caller ID. He wants homeowners in trouble to realize that getting a 2 percent loan for five years, which will work its way up to 5.4 percent over an additional four years is an opportunity too good to pass up.

Great idea. Now, if he could just get people to realize that interest rates on the loan modification program will never drop below 2 percent - or will they?

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