Recent news reports are bringing a great deal of interest in a new FHA program designed to help homeowners who are “underwater” on their mortgages. The new program modifies the Making Home Affordable program and the FHA’s own refinancing programs, allowing FHA lenders to offer FHA refinancing loans that forgive at least 10% of a qualifying borrower’s original mortgage principal.

These loans are for home owners making payments on a conventional or sub prime mortgage for a property not worth as much as the borrower owes on the original loan (also known as a “negative equity position”.) To qualify, applicants must owe at least 15% more on the property than it’s actually worth.

According to a press release by the FHA, the program is “designed to maintain home ownership by providing borrowers, who owe more on their mortgage than the value of their home, opportunities to refinance into an affordable FHA loan.”

The new program offers important help for those who qualify—ten percent a respectable amount of money to have taken off any amount owed on a mortgage—but the Department of Housing and Urban Development reminds potential borrowers that this particular refinancing program is only for those who are current on their mortgage payments.

There are other FHA requirements for this refinancing loan, including residency—the borrower must be living in the home being refinanced as their primary residence. The borrower must qualify with a credit score of at least 500.

It’s also important to know this FHA program is designed for homeowners with conventional or sub-prime loans. It is not intended for borrowers with FHA mortgages. There is also a time limit on this program; qualified borrowers may apply for refinancing for loans with case numbers issued on or after September 7th 2010 and closed on or before the end of 2012.

This refinancing program can help homeowners avoid default and foreclosure on an existing conventional or sub-prime mortgage, but FHA requirements for lenders include a warning that borrowers should be aware of: the FHA requires lenders to inform applicants that this loan forgiveness program may, “be reflected as a negative feature on a borrower’s credit score.” The FHA also advises borrowers to check with a tax professional to learn what tax implications might come with having 10% or more of the original home loan amount forgiven.

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The best time to refinance a mortgage is determined by a confluence of a two key factors: bettering your mortgage terms, and lowering the cost to borrow. It’s that simple. If you are not bettering your mortgage terms for you and you are not lowering the cost of borrowing when you look at the whole picture, you should not refinance.

Bettering Your Mortgage Terms

There are several ways to get better mortgage terms for you. So part of the decision to refinance a mortgage depends on what it is that you want to refinance to accomplish. Here are some typical ways people better the terms of their mortgage:

  • Eliminating PMI. Private mortgage insurance goes away once you owe less than 80% of the value on your home. If you can show that the value of your home is greater than what you owe putting you under the 80% mark when you refinance you save the PMI which is a monthly cost that can be significant. Typically when all costs are considered home owners pay about 12% to have private mortgage insurance rather than pay off that amount of the loan.
  • Shortening the payoff period. The payoff period is usually part of the label you were quoted for your mortgage. The most common are the 30 year and the 15 year mortgage. The fewer years you have your mortgage the cheaper it is for you in interest. The reason is a 15 year mortgage is usually a lower interest rate, and more importantly, you pay the interest for a shorter time. Even if your payment goes up, you are saving money over the long haul.
  • Lowering your monthly payment. This does not always mean the mortgage is a better deal for you. You could lengthen the term of your mortgage and get a lower payment, but it will cost you more in the long run. However, if you can keep the term of your mortgage the same, and still lower payments then the terms are better for you. Or, if you simply can no longer afford to make the payments then even if it costs you more in the long haul on the mortgage, it will save you big time on your credit score and eliminate loss of equity through foreclosure.

Lowering the Cost of Borrowing

  • Lowering the percentage rate. The most basic reason to refinance is the market has lowered the rate you can get on your loan by at least a percentage point. If the APR (annual percentage rate) of your new loan is lower than the lending rate on the old, you should refinance. The APR takes into account the closing costs of the mortgage as part of the interest rate. Don’t compare APR to APR since you already paid the closing costs on the current mortgage, you can’t save any money on that.
  • Preventing foreclosure. The costs of foreclosure are difficult to quantify for each person. However, if there was any equity in the home you lose all of those years of payments into that equity. Further, your FICO score will plummet making it hard not only to buy a new home, but even to rent a good one in many locations. Many landlords now require a credit screening and will not rent to people who have recently defaulted on financial obligations. This doesn’t take into account the costs of personal dignity, respect, and reputation in a community.
  • Leveraging debt. In rare occasions, holding onto a mortgage saves the person more than paying it off. If there are investment vehicles that consistently pay a higher percentage than the APR on the mortgage then it is worth considering refinancing your home to get equity out and reinvesting in solid, low risk investment vehicles that leverage the debt in the home.

Dave Ward is a real estate investor, professor, and freelance writer. As the author of When to Refinance Rule of Thumb he believes consideration of a few key factors can help any homeowner make an informed decision on the best times to refinance their home.

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By Robbie T. James

Applying and qualifying for a home loan is something that you want to try to time as well as you can. Most mortgages are 30-year, fixed-interest loans. This means that the day you apply for the loan and receive an offer for a particular rate is a very important one; this rate will affect your pocketbook for a long time to come.

When looking to refinance a home mortgage or to move into a new home, it is understandable that you would want to make sure you are getting it right in terms of timing. It would be an unfortunate situation if either:

a. you waited an extra month, only to find that rates had started to climb back up, or, at the other extreme,

b. you signed the papers for a new mortgage loan today, only to learn that a month or two later the rates dropped even more

Every smart homeowner (or homeowner-to-be) understands that getting the lowest rate is desirable. But, timing the mortgage interest rate market accurately is no easy task.

If you are interested in a mortgage rates forecast, here 5 tips to help you get the best rate:

1. Fixed mortgage rates reflect ongoing changes in Treasury note yields:

It is helpful to learn how mortgage rates are determined. In the case of fixed interest rate mortgages, the daily change upward or downward in available interest rates is directly influenced by the yield on something called a Treasury note (or T-note). Reason: T-notes and mortgages are two of the safest-possible investments a person can make, with T-notes being slightly less risky.

2. Adjustable-rate mortgage rates reflect changes in the fed funds rate:

Similarly, adjustable rate-mortgage rates are directly influenced by the fed funds rate, which is the interest rates that banks use to give each other short-term loans.

3. Nobody can predict mortgage rates:

Clearly, both of these factors (T-notes and fed funds rate) are outside of the control of any single market player or investor, making it impossible to predict or influence future trends in interest rates.

4. A good indicator for where rates are going is to look at historical trends:

However, you do have the ability to remain informed about the significance of today’s interest rates by looking at how they trend over time. Have a look 1-month, 3-month and 1-year rate trends and see how today’s rate compares. You can at least get a sense of where the rates are today, which can help you make an informed decision about when to apply.

5. Remember an additional layer of influence you have:

All of the discussion thus far has addressed average interest rates. However, the rate for which you qualify is also a function of the individual lender with whom you apply, as well as your credit score. Be sure to apply to at least 5 lenders before deciding upon one, in order to get yourself the best rate.

As you look for a mortgage rates forecast, consider these 5 tips for qualifying for the best-possible rate.

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