New opportunities to make your home more affordable

Todd Ballenger, Founder, National Institute of Financial Education

Mortgage interest rates are at their lowest since the 1950s,¹ yet many homeowners still have not taken the opportunity to refinance. Why? It's possible they already have a fixed-rate mortgage with a low interest rate and don't see a financial benefit to refinancing.

However, it's also possible they know about the low rates available today, but are in the group of millions of Americans who can't refinance because of low property values or cash flow challenges. If you're in this group, the new Making Home Affordable (MHA) program could offer real solutions to help.

The MHA program is focused on helping homeowners who are financially responsible but through no fault of their own have seen the value of their homes decline. It's also designed to help homeowners who have recently found it difficult to make their monthly mortgage payments, perhaps because their interest rates have increased or they have less income.

The program offers these homeowners options to make their houses more affordable, helping them avoid defaulting on their mortgages or suffering foreclosure, which could negatively impact their personal net worth as well as property values for the community at large.

How the MHA program works

There are traditionally four criteria lenders use to determine credit worthiness: capacity, collateral, character and credit rating. The MHA program addresses the two areas most directly affected by our current financial crisis – capacity (the ability to repay – income relative to expenses) and collateral (the security for the loan – your property's current value) – by offering two new options to homeowners: an MHA Refinance and an MHA Modification.

Do you have a solid payment history, but a high interest rate?
Consider an MHA Refinance.

For those who want to take advantage of lower interest rates, but don't qualify because their homes have decreased in value, an MHA Refinance may help. This option is available until June 2010, and is targeted at helping homeowners who are current with their mortgage payments secure lower interest rates.

For example, let's say you purchased a home in 2007 for $300,000 and have a current mortgage balance of $250,000 at 6.5% for a 30-year term. You'd like to refinance to a current rate of 5.25%, but your house is now worth only $240,000. Since you have no equity, you don't qualify for the typical refinancing options available through local banks. However, because your loan balance is less than 105% of your current home value, you could qualify for an MHA Refinance, which would reduce your mortgage payment by $200 per month.

To determine if you're eligible for an MHA Refinance, answer these four questions:

1. Is this mortgage for my primary residence?

2. Is my loan with Fannie Mae or Freddie Mac? To find out:

   • call (800) 7FANNIE or visit fanniemae.com/homeaffordable
   • call (800) FREDDIE or visit freddiemac.com/avoidforeclosure
3. Am I current on my mortgage payments (no payment over 30 days late)?
4. Do I think my mortgage balance is no more than 105% of my current house value?

If you answered YES to all four questions, and you've already ruled out a traditional refinance opportunity, you should immediately contact the company you send your payments to. Loan servicers have incentives from the government to work with you to quickly take advantage of this new program, so get in line early. Gather the documentation they request and take advantage of lower rates now.

Are you at risk of defaulting on your mortgage?
An MHA Modification could help

If you are having difficulties making your current mortgage payments or are nearing default, an MHA Modification may be your next best alternative. This option is available until January 2013, and is designed to help homeowners who are experiencing cash flow difficulties – perhaps because of a job loss or an increase in the rate on their adjusted rate mortgage – to reduce their mortgage payments to no more than 31% of their gross monthly income.

Let's say your income is $80,000 a year and your mortgage payment is $2,500 a month, or 37.5% of your current income. With an MHA Modification, the loan servicer can modify your loan to a rate as low as 2%, or extend your loan up to 40 years to drop your payment to 31% of your income.

To determine if you're eligible for an MHA Modification, answer these four questions:

1. Is this mortgage for my primary residence?
2. Is the amount of my mortgage less than or equal to $729,750?
3. Am I having difficulty making my current mortgage obligations?
4. Did I get this mortgage before Jan. 1, 2009?

If you said YES to all four questions, you should contact the company you send your payments to immediately.

With all of these options, which one should I choose?

The route you choose to make your mortgage more affordable depends on your specific situation. But it may help to consider these general guidelines:

Solution #1 - Traditional Refinance
Utilize a preferred bank to lower your interest rate, consolidate debt and increase cash flow.

Solution #2 – MHA Refinance
Refinance to a lower rate even if your mortgage is up to 105% of your current property value.

Solution #3 – MHA Modification
Reduce your monthly payment to no more than 31% of your gross monthly income, even if you've already missed one or more payments.

Last Resort

• Forbearance
• Repayment plan
• Pre-foreclosure sale
• Deed-in-lieu
• Foreclosure

Find more information on the above terms within the HUD glossary.

Getting started

Regardless of your situation, it's important to consider refinancing now – before today's historically low rates go back up. Your best first step is to contact your Ameriprise financial advisor, who can help you determine which option is most appropriate for you. Your advisor also has access to the suite of lending and mortgage solutions available through Ameriprise Bank.

For more information on the Making Home Affordable program, visit http://makinghomeaffordable.gov.

Todd Ballenger is author of Borrow Smart, Retire Rich. He is also the founder of the National Institute of Financial Education (www.niofe.org), which offers a series of video classes and materials on the new Making Home Affordable program as part of a Financial Red Cross program.