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There are few advantages to a financial meltdown, but they do exist. One of them is the significant drop in mortgage interest rates that generally comes hand in hand. You could save thousands of dollars by refinancing your mortgage now interest rates are at an historical low. The question is: can you? This article will look into the three factors that will determine if you are eligible for a mortgage refinance.

First of all, it is worth spending a paragraph on explaining the difference between a loan modification and a mortgage refinance.

Loan modifications are an emergency measure designed for people who cannot pay their mortgage. It reduces the interest rate, extends the length of a mortgage, and in some cases reduces the principal balance of the loan. This measure will have a negative effect on your credit score because you failing to pay the mortgage you signed for. Mortgage refinance is generally not an emergency measure but a strategic move from your current mortgage to another mortgage with lower interest rates. There is no negative credit score impact, because the first mortgage is paid in full before signing a new one. Loan modifications are for homeowners in trouble, while mortgage refinancing is for borrowers that can afford their payments, or pretend to do so, and want a better deal.

So what factors determine if you should refinance now? You should investigate three areas of your personal circumstances: 1) Your credit score, 2) Your home equity, and 3) If you actually save enough money for it to be worth the effort.

Let us look at these factors individually, and see how they relate to the larger picture of mortgage refinancing.

Credit Rating.

When you look for a mortgage refinance you are in effect looking for a lender that offers you a better deal on your mortgage. For a lender to invest in you, you must go through the same procedure as when you got your first loan. The lender will need to make sure you are a reliable borrower and worth the risk. The best way to assess if you will qualify is how good your credit score is. If you do not have a good credit rating, refinancing is simply not an option.

Home Equity.

You need to have some equity on your home for a lender to even consider refinancing your home. The equity on your home, that is the difference between its current value and your mortgage’s balance, is the collateral security you provide your new lender. If it is not large enough, you will not get many lenders willing to take the trouble.

Is it worth it?

There is no point in refinancing a mortgage for the sake of refinancing. You must make sure it actually saves you money. Mortgage refinancing initially cost you money; you only reap the benefits after years of a reduced interest rate. If you are not planning to stay long in your home there might be no sense in refinancing. However if the circumstances are right you could actually save thousands of dollars on your mortgage, and be one of the few that benefited from the financial meltdown.

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Erin and Robert Smith had no problem handling the $2,000 monthly payment on their home ... until they lost their jobs.

The million dollar question millions of Americans are asking themselves is “should I walk away from my underwater mortgage?

The situation is so dire that according to Moody’s Economy.com 17.4 million homes will be underwater by the end of 2010.

That is worth reading again: By the end of 2010 17.4 million homes might be worth less than the value of their mortgage.

This presents homeowners with a dilemma. Should they continue making big monthly payments on a home that might never be worth what is was bought for, especially when there are cheaper rentals in the same area?

The answer to that question is not easy; there are many factors to take into consideration before deciding if a “strategic default” makes economic sense.

However many homeowners don’t even consider it an option out of fear and guilt. The moral argument is that when you signed your mortgage you gave your word you would pay for it, so it is your responsibility to stick to your word. Banks like that argument, and most of us can see the logic in wanting to keep your word, that your yes mean yes. However a mortgage is a business agreement and it is not as simple as all that.

When you sign a mortgage agreement you are not accepting charity, a display of trust or blind faith from your loving bank manager. You are entering a business agreement where you agree to pay back the money you borrow with interest. The agreement you sign clearly states that if you don’t pay your mortgage the lender will receive the loan’s collateral in compensation. The bank is required by law to carry out due diligence when assessing the price of the house is fair and that you are capable of paying the mortgage payments.

So when you walk away from your mortgage you are not lying you are simply using an option included in the mortgage, an option you feel is more financially sound.

However, others don’t walk away from a mortgage not because of morals but out of fear the bank will go for their other assets, like a car, a second home or their savings, in an effort to cover the losses of the underwater mortgage.

This is a legitimate concern, but it depends in which State you live in. If you are fortunate enough to live in a no-recourse state like California or North Caroline you have nothing to worry about. Banks cannot claw at your other assets to cover the whole you left in their real estate portfolio. However if you live in a State that has recourses there is a higher risk.

However, lawsuits are rare because they are so expensive and judges tend to empathize with the troubled homeowner before shedding tears for multibillion corporations.

Nevertheless, if you are considering walking away from your underwater mortgage one of the first things you want to find out is if you live in a recourse or no-recourse State.

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Last Friday Treasury revealed the latest data on HAMP, the Administration’s major foreclosure prevention program. The data has been sold as evidence of the significant progress made from pressuring mortgage servicers. Are loan modifications finally becoming the solution for the mortgage crisis as the Government has always claimed?

Let’s have a look at the figures.

Around 900,000 homeowners have entered the program with a trial loan modification.  66,465 homeowners have received permanent modifications as of December 31^st. That’s where the good news lies, November’s figures for permanent loan modifications were half that, at 31,382. This progress is being reported by Treasury as a “significant acceleration of the rate at which borrowers are being approved”. Hard to argue with that when the numbers doubled in a month, but is it enough?

Let’s have a closer look at the figures and the program as a whole.

The program is designed to allow homeowners to enter a three month trial loan modification, during which they are supposed to provide lenders with all the documentation required for a permanent modification. However trials are stretching for much longer. Servicers blame homeowners being slow at handing in paperwork; homeowners blame servicer of losing paperwork and making mistakes. Treasury’s response to this mess has been to allow for longer trial periods, up to 5 months. However mortgage servicers have kept homeowners in what is being called “trial purgatory” for up to nine months.

This seems to be one of the big issues the HAMP program faces, a complete gridlock of loan modification trials. Have a look at these figures:

In October Treasury reported that 487,081 trial modifications had been started. Three months later not even 24% of those trial modifications had been resolved one way or the other. Let’s put this another way 76% of the current trial loan modifications are in limbo. Treasury has pointed out that 46,000 homeowners have been approved for a permanent loan modification but are yet to sign the paperwork that will make it final. Even if this were true it would still mean that 66% are still waiting for a verdict on their loan modification.

Consumers are blaming big banks for creating this loan modification limbo and the figures seem to support that claim. The big four banks, Bank of America, JPMorgan Chase, CitiMortgage and Wells Fargo represent more than 60% of the 3.4 million mortgages eligible for the HAMP program. The best of the bunch Wells Fargo has only completed 13% of its eligible loan modifications. The rest are doing much worse. Bank of America the largest mortgage provider by far is performing the worst, converting only 3% of their 1 million eligible mortgages into permanent modifications.

No matter how Band of America tries to window decorate these figures advertising they have surpassed the 200,000 trial modifications barrier, this is all rather pathetic. We are not even saying they should convert more trials into permanent loan modifications but at least put homeowners out of their misery and tell them what the outcome is, one way or another.

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Loan Modifications are big business. People are willing to pay large sums of money to modify their mortgages to monthly payments they can afford. Many companies are willing to supply financial knowhow and procedures to smooth the process towards a loan modification.

These companies advertise as experts that understand all the ins and outs of the loan modification world. They claim to speed up the procedure and know all the right answers a layperson could not possibly do on their own.  In order to attract customers loan modification agencies like 1^ST Foreclosure Prevention are opening affiliate programs. These affiliate programs offer incentives and bonuses to sales representatives that attract new customers in the same way that insurance or car salespeople take a cut from a sale.

Affiliate Sales Representatives are asked to have a strong motivation and enthusiasm as well as good communication skills with the borrowers, which They are not expected to be mortgage or loan experts, that is the job of the company, the only responsibility they have is to attract the customers. The attractions for the posts are mainly the money and being able to work from home.

Things were never so good for loan modification and refinancing companies so they are all on a hiring spree. The five digit salaries loan modification companies advertise are sure to attract attention. The question is if borrowers should pay agents for loan modifications.

As usual your opinion will depend on if you stand to gain or not from the operation. Loan modification agents will argue that loan modifications are complex procedures which the average layperson is unsuited to perform and that loan modification agents offer a valuable service to borrowers that might otherwise not be able to take advantage of a loan modification.

The Obama Administration is however encouraging borrowers to turn to government sponsored loan modification advice centers for free help and are discouraging homeowners from paying for a service they can do themselves or get done for free.

Whatever you decide to do it is important to remember that loan modification agents, no matter how good they are, cannot guarantee a loan modification will be accepted, that is up to the lender. Other factors like the mortgage’s NPV test also condition the outcome of the loan modification application. This means that the agent has no way of guaranteeing success no matter how much he charges. It is important not to pay for loan modification services upfront before they are carried out.

It is also important to understand how the loan modification process works and what you are expected to supply to your lender. Loan modifications depend on two main factors: What your house is worth and what you can afford to pay. Loan modification agents will help you to fill in the loan modification paperwork in a way that does not undermine your chances of getting a loan modification.

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Understanding the factors that control the success or failure of your loan modification is vital if you want any chance of receiving a positive modification to your mortgage. Loan Modifications are not happening very fast and the modification rates for troubled homeowners are very low.

The reasons for this are many because loan modifications are complex and depend on a number of variables. Borrowers may fail to fill in paperwork, applications get lost in the process, banks and servicers drag their corporate feet and sometimes loan modifications are just bad business for lenders and must be dropped.

Determining if a loan modification makes financial sense to a lender is the purpose of the NPV (Net Present Value) test. It pays to understand how this test works because anybody that fails it has their loan modification automatically cancelled.

Why have an NPV test?

The purpose for the NPV test is to guarantee a loan modification is profitable in the long term for banks and servicers. The test is made up by an algorithm that takes into account various factors that will determine the behavior and attitude of the borrower, the price of the house and the ability of the borrower to pay the modified loan payments.

The exact form of the algorithm is kept secret to stop borrowers from trying to rig the test. The test measures the likelihood of a borrower from re-defaulting on their mortgage. This is determined by the income of the borrower and the reasons the borrower has to stay in the house. For example if a single borrower is stuck with an underwater house and has no ties with his current neighborhood he or she is going to get a much lower rating than a family with two children that moved to be closer to their aging parents.

An important part of the NPV test calculates the current value of the house. This takes into account the cost of foreclosure and the expenses related to selling the property. Once the “deducted” or real value of the house is determined it is compared with the return the bank would get from a modified loan. If the lender does not benefit from the loan modification it is automatically revoked.

How to help your chances to pass your mortgage´s NPV test?

The NPV test mainly deals with facts and figures that are hard to influence, unless you lie, but there is still much you can do to improve your chances of passing.

It is important to create a solid case that proves you are highly motivated to stay in your house. One of the biggest costs of loan modifications is that after all the work, time and money invested borrowers often re-default bringing on the borrower all the costs of foreclosure he was hoping to avoid with the foreclosure.

This can be done by giving good reasons why you will stay in your house whatever happens, even if it is underwater and does not seem like a great investment at the moment.

The valuation of your mortgage is a very important part of your NPV test. You cannot do much to control the valuation but federal valuation projections change every quarter so if you failed your NPV test one quarter it is worth doing it again the next if you still have time.

A final step you can take is to provide evidence of why you can´t afford the current mortgage payments. Loan modifications are expensive as they include reducing interest, often for the lifetime of the loan, so banks need to make sure they are not providing loan modifications to borrowers that could afford their current loan payments with a little bit of effort and good old fashioned frugality.

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This is the question administration consultants and officials are asking themselves. After using every trick in the book and more to “encourage”, “bribe” and “bully” servicers in providing loan modifications, loan modification conversion rates are still terribly low.

Ineligible Applicants.

Some have reasoned that the reason loan modification conversion rates are so slow is that many borrowers are simply ineligible under the current loan modification program, also called Home Affordable Modification Program (HAMP). HAMP does condition acceptance into the program, homeowners must be able to afford the modified payments, the cost of housing must not exceed 31% of the households income and the NPV test (Net Present Value) must be passed among other requirements before a loan modification is granted permanently.

Wrong Crisis.

A parallel argument is that the HAMP program is simply targeting the wrong problem. The issue, in the opinion of those that voice this argument, not a mortgage crisis, but a credit or unemployment crisis.  It must be granted that with many homeowners their mortgage is the least of their worries or at least only one of many.

This argument seems to be validated by the fact that more and more troubled homeowners have prime loans with excellent interest rates and conditions but are struggling with their mortgages because they are unemployed. Modifying the mortgage payments will not help these homeowners which in most cases aren’t eligible for a modification anyway.

Greedy Servicers.

Some have pointed out that in many cases loan modifications simply don’t make sense for servicers because they cost more than they are worth, at least for servicers. Servicers, often banks, manage mortgages for lenders. They don’t supply the cash but deal with customer service, collect payments and pass them on to the lender or lenders of the mortgage.

Loan Modifications are too expensive.

A similar line of reasoning points to high cost of modifying a loan. Lowering the interest of a loan or reducing the principal can cost lenders tens of thousands of dollars with the added risk that borrowers can re-default despite the money invested in the loan modification. From a business standpoint if can seem logical for banks to say no thanks to government incentives which are often inadequate and cash in on a foreclosure.

If any of these explanations are true of if they all contribute to the program is hard to say. What does seem clear is that we are dealing with a complex crisis that will not be defeated with any one silver bullet. A combination of economic and social measures will be required to fight the housing, credit and unemployment crisis the U.S and world as a whole faces.

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Loan Modifications and Mortgage Modifications are being sold like they are going out of fashion and both the Government and private banks are reporting successes in the number of loan modifications and mortgage modifications processed.

If you are desperate to keep your home and you are finding it difficult to pay for your mortgage payments a loan modification might be the option for you. However there is a question you must ask yourself. Is a loan modification or mortgage modification worth my trouble? There are a number of negative consequences that are attached to mortgage modifications.

Among them is the risk of paying more that the mortgage is already costing you in deferred and balloon payments.

Another issue related to mortgage modifications is the possibility your credit score could be affected. It might surprise you but taking a government sponsored loan modification could lower your credit score. The reason for this is that some banks and loan providers report loan modifications as partial payment plans. These plans include programs that reduce the debt of borrowers that can’t afford to pay their loan. FICO, one of the organizations that prepare credit scores from the information financial institutions quantify partial payment plans negatively.

This could make it harder for borrowers that take on a loan modification to buy a home in the future. Of course if you are happy where you live and you just want to save your home this should not be a problem.

First-time Homebuyers Tax Credit

A completely different type of credit that people are concerned about is how the mortgage crisis will affect previous government sponsored first time homebuyers tax credit programs.

These tax credit provide a tax break, a percentage discount or sometimes a dollar to dollar deduction from tax of any mortgage related expenses.

The government is as interested in promoting home purchases as it is to stop foreclosures so these programs have been extended. However the recession is affecting the U.S budget so it is wise to get on the first time homebuyers tax credit bandwagon while there is a wagon to ride. The deadline for applying for a tax credit has been extended so that purchase agreements must be signed before May 1^st and closed by July 1^st.

For more information on this matter visit www.federalhousingtaxcredit.com

The same applies for other tax credit programs like the HOPE scholarship tax credit, a sister program to the HOPE loan modification program. This tax credit program provides dollar for dollar tax breaks on college tuition, fees and course materials. This program will end next year so it pays to apply early. For more information visit www.finaid.org.

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Loan servicing companies have put 500,000 troubled borrowers into trial mortgage modifications, the Obama administration said Thursday.

It seems Obama’s administration has a program for every issue. If you are struggling with your mortgage but are keeping up with your payments (wouldn’t that be 90% of us) you can get help with HARP. If you are delinquent (behind in your monthly mortgage payments) you can try your luck with HAMP.

HAMP stands for Home Affordable Modification Program. The program is designed to help borrowers who are struggling to keep their loans current or who are already behind. HAMP does this by providing incentives to mortgage loan servicers to modify existing first lien (primary) mortgages. The Treasure hopes this will motivate mortgage providers to move faster with loan modifications. It doesn’t seem to be working quite as planned but the effort is certainly there.

What makes HAMP any different to the other loan modification programs? To start, as mentioned above you can apply for HAMP even though you are behind in your payments. You can also apply for a HAMP loan modification even if your mortgage is not provided or guaranteed by Fannie or Freddie, a requirement most other government programs have.

So what are the requirements for a HAMP Loan Modification?

1.) You must have a home and live in it. The home must have one to four units.

2.) You must owe a principal balance (the actual amount you borrowed without interest) that is equal or less than:
1 Unit: $729,750
2 Units: $934,200
3 Units: $1,129,250
4 Units: $1,403,400;

3.) Be the primary mortgage and have been contracted before January 2009.
Your monthly payments must be greater than 31 percent of your monthly income. If it isn’t we kind of assume you don’t need a mortgage modification.

Unfortunately for many the mortgage is the least of their “loan problems”.
Have a mortgage that is not affordable due to financial hardship that can be documented (that means you can prove it).

If you answered yes to all the above questions you MAY qualify for a HAMP loan modification. The final yes will have to come from your mortgage provider. You must contact your provider in order to find that out.

But what if you aren’t behind in your payments, can you apply for a HAMP Loan Modification.

Yes, the requirements are those stipulated above, no more, no less.  This is good news for borrowers that are making payments, want a loan modification in order to take advantage of the lower interest rates but can’t do so because their home value has dropped and they don’t have a mortgage with Fannie or Freddie.

What you will need to do is prove why you are struggling to make your payments. This will have to be documented so be ready to show paperwork to back your claim.

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