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CitiGroup is busy advertising an alternative to HAMP loan modifications. The alternative is nothing new, the refinancing of mortgages with a 30 year fixed rate mortgage. What makes this option attractive is that interest rates are currently low. Homeowners that bought their house with a high interest rate can benefit from refinancing with improved conditions.

The mortgage refinancing offered by CitiGroup includes 30 year fixed rate mortgages with interest rates as low as 5%. The benefits the international banking group advertises include lower mortgage payments, access to home equity and even a reduction in the length of the loan’s tenure.

If you qualify for a mortgage refinance your mortgage is completed and paid for by a new mortgage with new conditions. If the new conditions are an improvement from your previous loan you could enjoy substantial savings.

However that is one big IF. Refinancing has been around for a long time, some even suggest that refinancing had a hand in creating the mortgage crisis we are now experiencing. In order to refinance a mortgage the new mortgage must be large enough to pay for the previous mortgage and still provide some kind of savings to the homeowner as well as pay for the expenses incurred in the process.

Unfortunately most troubled homeowners are stuck with underwater homes that are worth less than the mortgage. CitiGroup, or any other bank, are unlikely to refinance a home that is worth much less than the current loan.

Refinancing remains a solution for homeowners that are struggling to pay their mortgage, have a high interest rate mortgage and still have some equity on their home. For the vast majority of troubled homeowners out there this is simply not an option.

However if you circumstances comply with the scenario mentioned above you would be well advised to act quickly. Interest rates could rise soon and a 30 year fixed rate mortgage at 5% is a sweet deal.

If your house is underwater then the options are very different. Your first decision must be if it is worthwhile for you to keep the house. This decision will depend on your moral view of loans,  you’re your projection for the housing market is and what you can afford towards monthly mortgage payments.

HAMP loan modifications provide help for underwater borrowers but require that mortgage payments remain below 31% of the household’s income. Another requirement is that the mortgage passes the NPV (Net Present Value) test which measures the profitability for the lender of granting a loan modification. Although these are only two of the requirements for a loan modification they illustrate how difficult it is for homeowners to comply with them. Reducing mortgage payments can only be done by reducing interest rates, extending loan tenures, reducing loan balances or rolling interest payments to the end of the loans lifetime. Reducing interest rates and loan balances are not very popular with lenders while lengthening a loans tenure and paying extra interest at the end of the loan are not very good options for already struggling homeowners.

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1. Loan Modifications: Why Is Citigroup Optimistic About Future Loan Delinquencies
2. Loan Modification And Loan Refinancing What Is The Difference
3. Loan Refinance Simple Answers: Profitable Refinancing and Underwater Loans

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Fannie and Freddie are on soaring. For five days in a row Fannie Mae and Freddie Mac mortgage securities have rose. Interesting the rise in mortgage bonds is not due to an increase in the mortgage refinancing and modifying but in a reduction in refinancing, well below the forecasted levels.
Bloomberg.com reported yesterday a rise in Fannie Mae’s current-coupon 30 year fixed rate mortgage bonds of 0.09 to 4.8 percent.  This is the highest since June 18.

What has driven this rise in Mortgage Bonds?

The Treasury Department has published reports with higher benchmark rates due to a recent report that showed a slowing down in the number of jobs lost in the United States.

What are the effects?

This rise in mortgage rates has caused refinancing to slow down. This is evident when you see the drop of 21 percent on the number of prepayments last month to Fannie Mae and Freddie Mac securities. This drop was sharper than analysts predicted triggering the rise in mortgage bonds.
The rise in mortgage rates after record lows in interest rates has slowed down the number of mortgage refinancing, making it much harder homeowners without the best credit rating to get their mortgage refinance approved.

How Is The Obama Administration Reacting?

The Obama Administration announced a loosening of Fannie Mae and Freddie Mac rules in order to boost the number of borrowers that refinance and modify their loans by increasing the percentage of the home value the mortgage can represent to 125% of the house’s value. This helps homeowners that have seen the value of their house drop refinance.

Fannie Mae and Freddie Mac are also planning to reduce their home financing costs. Currently even the government sponsored mortgage companies charge up to 2% of loan balances with sub-premium customers with low equity or credit scores.
The Bottom Line

An increase in mortgage bond rates is not necessarily good news for borrowers as it will increase interest rates but the rise is being pushed by lower unemployment growth which is a good news for the overall economy. Government mortgage companies Freddie Mac and Fannie May must also reinvest their “profits” in aiding borrowers in trouble by either reducing their fees or the principal on loans which can be good news for borrowers in the future.

Related posts:

1. Mortgage Applications Fall as Interest Rates Rise
2. Mortgage interest rates drop but illegal mortgage fees could negate savings
3. Mortgage Refinancing For Underwater Borrowers Now Available

Related posts:

1. Mortgage Applications Fall as Interest Rates Rise
2. Mortgage interest rates drop but illegal mortgage fees could negate savings
3. Mortgage Refinancing For Underwater Borrowers Now Available

A balloon mortgage is one in which monthly payments are made for a pre-determined period of time, with the balance of the loan paid in full at the end of the loan term. Like an ARM, interest rates on a balloon mortgage are typically lower than on a fixed rate mortgage and this makes the monthly payments on a this type of mortgage are very low and affordable. Balloon mortgage loans are calculated to amortize over a longer period than the due date of the balloon. A balloon, or lump sum, payment is required at the maturity of the loan to completely pay off the remaining principal. Therefore its important to keep in mind that the terms on a balloon mortgage are insufficient to completely amortize the loan.

Balloon mortgages can, and often do, contain a contractual opportunity to refinance at prevailing rates when the balloon payment is due. If the balloon mortgage loan has the option to be refinanced when the initial period expires, it will be called a convertible balloon mortgage. Some balloon mortgages come with “reset” clauses that provide for the original lender to reset the loan terms so that the loan is fully paid off in the remaining twenty three to twenty five years. The advantage of a balloon loan with a reset is that the loan payment will remain constant for the remaining life of the mortgage. The disadvantage is that the borrower is subject to the then current rates. If you are unable to convert or refinance the balloon mortgage, you may be forced to sell your home to make the loan whole. However, for the initial period of the loan, the interest rates on a balloon mortgage are usually a little lower than a comparable Adjustable Rate Mortgage.

Alternatively, with a fixed-rate mortgage you’ll have the benefit of knowing exactly what your monthly payments will be for the entire term of the loan. Because few people have the funds to fully pay off the balance due at the end of the balloon term, when using a balloon mortgage as the instrument of financing, the borrower should be concerned about future interest rates because they will be subject to them when the loan matures. However, most people that take out balloon mortgages assume that they’ll be moving within the term of the balloon period or that they will be eligible for a more attractive loan at the end of that period. Many people also use balloon mortgages to get that larger dream house. This strategy can, in fact, be fairly risky and a borrower should consider the market risk against the benefit of a larger home. Again, at the end of that period, the borrower must pay off the loan in full – this is the “balloon” payment. For example, a 7 year balloon calculated to amortize over 30 years will have low payments for 7 years and then the remaining balance will be due.

Before borrowing it’s important to consider whether you already have too much debt, whether you will be able to service the debt if you refinance at the end of the balloon period (or pay the balance), the risks associated with the current real estate market, and other factors as well. While it can be fairly easy to make the monthly payments on a balloon mortgage, it is very important to consider that there could be difficulty in managing the terms of the loan once it matures. In the current climate, fixed-rate mortgages are definitely the “loan of choice” for homeowners seeking a refinance mortgage, but if all the factors are considered and risks weighed, a balloon mortgage can be a viable alternative. Loan programs vary depending on the borrower’s credit, closing costs vary from state to state, work with your loan officer to get a proper estimate when you apply for your loan.