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FHA Loans Offer a Way Out of the Mortgage Trap Via Refinancing

Richard Barrington
LoanBiz Columnist

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For many years, FHA loans have helped less affluent Americans become homeowners. Now, the mission of FHA loans has been broadened by a new FHA loan program designed to help Americans keep their homes. FHASecure is a new FHA loan program designed to assist homeowners with problem mortgages by helping them obtain refinancing into more manageable mortgages. Often, the right type of refinancing is all a homeowner needs in order to continue to pay off the mortgage on a home.

Current Mortgage Climate

The current mortgage climate is characterized by sharply-rising default rates. While some of this is due to speculators who gambled on fast-rising home prices and then sought to bail out of properties when prices declined, a good portion of the mortgage problem is more heartbreaking. These are cases of well-meaning borrowers whose mortgages have put them at risk of losing their homes.

There are always unexpected financial reversals, such as loss of a job, which can lead to mortgage difficulties, but the reason there have been so many defaults at once is more systemic. More complex, option adjustable-rate mortgage structures soared in popularity in recent years. Many of these are structured to offer very low introductory payments that don't even cover the interest owed on the loan. The unpaid interest is added to the loan balance, and eventually the loan adjusts upward -- causing a perfect storm of higher rates, higher balances, and less time to spread it over.  Borrowers knew the payments could increase -- but weren't prepared for payments that were twice the old payment or even more.

This can lead to a type of mortgage trap: an adjustable-rate mortgage leads to an increase in payments; the borrower cannot meet these payments, and starts to fall behind on the mortgage; in turn, this deteriorating repayment history limits the borrower's ability to refinance the loan.

Reasons to Refinance

An inability to refinance is a problem, because there are two ways in which borrowers could be helped currently by refinancing their mortgages:

  1. Refinancing from an adjustable rate to a fixed rate stabilizes mortgage payments, making it easier to budget responsibly.
  2. Refinancing at lower interest rates can reduce the total interest expense over the life of the mortgage, and reduce the amount of each monthly payment. Interest rates have fallen significantly over the past several months, making lower mortgage rates available to people who are in a position to refinance.
  3. Refinancing can take the existing mortgage balance and spread it out over a new term of 30 years or longer, making the payments affordable.

In other words, access to refinancing is a key to escaping the mortgage trap.

FHASecure Helps Homeowners Escape the Mortgage Trap

FHA loans have worked by giving lenders confidence. The FHA provides an insurance program which helps protect lenders from defaults. This in turn makes lenders more willing to extend credit.

FHASecure, the new FHA loan program, works in a similar way, but was created for refinancing. Specifically, it is designed to help people who have run into trouble with adjustable mortgages. Borrowers who can demonstrate that they were making their payments before their adjustable mortgage reset may be eligible for this new FHA loan program. This can enable these borrowers to refinance into lower cost, more stable mortgages.

The FHASecure program is proving popular: it is on track to insure more than a quarter of a million loans in fiscal year 2008. With nearly 900 FHA-approved lenders around the country, this program is widely available. It should prove invaluable in helping Americans keep their homes by escaping the mortgage trap.

Source:
Federal Housing Administration


About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.

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