Q: I have two mortgages on my primary residence – the only residence I have. I do not own any other property. Both mortgages are owned by the same lender.
Currently, I owe more than my house is worth. My first mortgage is at a rate of 6.25 percent and the second is a home equity loan at 9 percent. We bought the house in 2006. We have been current on our payments and have no other debts. What advice do you have for us especially regarding the second equity loan?
A: You and millions of other Americans fall into that black hole of homeowners who, presumably, can afford their payments but can’t refinance to take advantage of today’s lower rates due to falling home values.
The first thing you have to determine is how much your home’s value has fallen and compare that number to what you owe on your first mortgage and on what you owe on your home equity line of credit. Next, you have to determine if your primary home loan owned or guaranteed by Fannie Mae or Freddie Mac.
If your primary loan falls under the purview of Fannie Mae or Freddie Mac, and the amount you owe on that loan is no more than 125 percent of the current value of your home, you might be able to refinance under President Obama’s Making Home Affordable plan. (Go to www.MakingHomeAffordable.gov to figure out if your loan is tied to Fannie Mae or Freddie Mac.)
However, your real problem might come in with your home equity line of credit. The Making Home Affordable plan works with primary mortgages but not so well with home equity lines of credit. Since both of your loans are with the same lender, if the debt on both loans isn’t more than 125 percent of the current value of your home, that lender may be willing to refinance both loans into a new loan under the plan. But you probably don’t have a guaranty that your lender will want to work with you.
If your primary loan exceeds the 125 percent number, your primary loan would qualify for the plan but the second loan would prevent you from refinancing the first loan. You could see if your lender would be willing under the Obama plan to refinance the first loan but subordinate the second loan – that is to say your lender would agree to modify or refinance the first loan and still keep the home equity line of credit in a second loan position on the home.
When you refinance a loan and have another loan in place, the payoff of the first loan allows the second loan to take a first lien position. That’s why first mortgage lenders always require a home equity line of credit lender to subordinate their loan on the refinancing.
If, however, your primary loan isn’t tied to either Fannie Mae or Freddie Mac or if your home’s value has fallen so low that your loan to value (LTV) is more than 125 percent, you may be out of luck.
A handful of lenders are working with their borrowers to give them the benefit of a lower rate while keeping all the other terms the same. You might want to check with your lender about this solution. If your current lender doesn’t require a new appraisal on the home and your family income is sufficient to afford the payments on the loans, you might find your lender willing to assist you.
I’m hearing from lots of people who say they can’t get the lenders to focus on them. Some have received letters from lenders saying they are eligible to participate in a refinance or loan modification, but when they call, the lender tells them they don’t qualify for the lowest interest rates or offers a refinance loaded with costs and fees.
And while there is no rule that says borrowers have to be delinquent in their mortgage payments before qualifying for some loan modification programs, some borrowers are being told they have to be late with their mortgage payment (and trash their credit) in order to get help.
Making Home Affordable does not require you to be delinquent on your mortgage to get help. But it’s a voluntary program, so lenders can decide what works for them. And, it appears that the Making Home Affordable plan pays lenders an extra bonus if they help customers who are late with their mortgage. Not a great incentive for helping someone who pays on time.
If you have some cash available, one option for you is to either pay down or pay off your home equity loan to a point where a lender might be able to offer you a refinance deal for both your first and second loans.
You might also ask your lender if you can qualify to refinance one or both loans if you use cash to pay down your primary loan.
Your next move is to sit down with a reputable lender and see what sorts of options might be available to you. Just make sure you understand what the costs of any refinance will be before you put in an application. Many lenders have increased the cost to refinance mortgages. You want to make sure these increased costs don’t eliminate the savings you’ll get from the refinance.
It’s unfortunate, but falling home values have caused havoc in the real estate market place.
See here for additional information on the Obama Making Home Affordable Program changes and the basic facts on the Obama Making Home Affordable Program