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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