How the Home Affordable Refinance program works

Pink piggy bank with trail of coins to a house

Lenders usually require homeowners to have a substantial amount of equity in their homes -- at least 20% -- to refinance.

That's an insurmountable problem for many people who desperately need to get out of an adjustable-rate loan but can't because home values have fallen so much during the last few years.

But the Home Affordable Refinance program, part of President Obama's Making Home Affordable foreclosure prevention program, is supposed to help borrowers overcome that.

It lets homeowners refinance a first mortgage worth up to 125% of the property's market value.

That's the case even if you have a second mortgage that puts you even further upside down on your home.

It means homeowners who owe more than 125% of their home's value will be able to qualify for the program even if that debt is split between two or more loans.

Let's say your home is worth $300,000 and you owe $375,000 on your first mortgage. You can borrow up to $375,000 to repay and refinance your first loan.

You can do that even if you have a second mortgage for $40,000, putting your total mortgage debt at $415,000, or 138% of the value of the home.

Many second mortgage holders have blocked that kind of refinancing.

However, some of the biggest banks, including Bank of America, Citi, Chase and Wells Fargo, have agreed to participate in the Home Affordable program's second-mortgage program.

That ensures that they'll accept a refinancing of your primary mortgage and help you afford the new payments by reducing the interest rate on your home equity loan to as little as 1% for five years.

The new primary mortgage will charge the prevailing interest rate for a 30-year, fixed-rate mortgage.

Lenders are going easy on requirements for minimum credit scores and suspending the usual requirement to have private mortgage insurance, even if you have less than 20% equity in your home, as long as the original mortgage didn't require mortgage insurance.

To qualify, you must be current on your mortgage, meaning no payments were more than 30 days late in the past year. And you must be able to document that you have enough income to support the new payments.

You do not have to live in the house. This is the first government program that will help you refinance vacation and investment properties.

Another possibility available since September 2010 is the FHA Refinance Option.

This plan asks the mortgage holder to reduce the amount you owe on your home by at least 10% so your total mortgage debt, including first and second mortgages, is no more than 115% of the current value of your home (97.75% if you only have one mortgage.).

To qualify, you must live in the home, be current on your mortgage, have a FICO credit score of at least 500, not currently be in an FHA loan and meet other requirements.

As with any program that reduces your principal amount, the FHA Refinance Option will have a negative effect on your credit score.

The other downside is that the banks don't have to agree to reduce your principal balance, and they have little incentive to do so on loans that are current, which they must be to qualify.

Results so far have been dismal. By the end of November 2010, just 61 applications had been made for this program, and one homeowner had been approved.

If you don't qualify for a refinancing plan, the Home Affordable Modification program might work for you instead.

To get your refinancing started, call your lender and say you want to take part. Or check your bank's Web site for more information.

If you have further questions, go to the government's Web site, MakingHomeAffordable.gov.