Obama’s refinance plan throws lifeline to underwater homeowners
President Barack Obama on Wednesday laid out a new plan to help "responsible" underwater homeowners lower their mortgage rates.
Congressional Republican leaders hate the proposal -- which Obama says would save the average homeowner $3,000 a year -- so that should tell you a lot about its prospects.
With that in mind, here are 6 facts you need to know about the plan:
Fact 1. It’s not going anywhere unless Congress agrees to pay for it.
Obama wants big banks to pay a financial fee to cover the costs, estimated at between $5 billion and $10 billion. Republicans aren’t keen on the plan.
House Speaker John Boehner (R-Ohio) said he doesn’t know why anyone would think this plan would work.
Fact 2. The plan is directed at about one-third of all homeowners.
The federal government already has a refinance plan available to the bulk of homeowners whose mortgages are backed or owned by Freddie Mac or Fannie Mae, the two government-controlled companies that provide financing for most of the country's home loans.
This proposal targets people whose mortgages are owned by banks and private investors.
The latest plan is an extension of the Home Affordable Refinance Program, which was supposed to help millions more homeowners than it actually has.
By last fall, only 900,000 homes had received new loans through the program because homeowners weren't allowed to borrow more than 125% of the value of their homes.
That led the president to scrap the cap. If you have a Fannie- or Freddie-backed loan, you can now apply for a new loan no matter how much you owe or what your home is currently worth.
Obama hopes to offer the same deal to homeowners whose mortgages are privately held.
Fact 3. The program is for "responsible" homeowners.
"Responsible" means you paid your mortgage on time in the past six months and weren’t late more than once in the past year.
If you qualify, you would be able to take advantage of record-low mortgage rates.
Fact 4. Banks would be asked to forgive some debt.
Owe the bank more than your home is worth? This program could work for you, but it might not work for your lender.
The fine print says Obama will work with Congress to require banks "interested in refinancing deeply underwater loans" to forgive a portion of your mortgage if your loan is up to 40% bigger than your home’s value.
So if your house is worth $100,000 and your mortgage is $140,000, the bank might be asked to forgive you that $40,000 difference when you refi.
Guess how much your bank is going to like that idea.
Fact 5. Dinged credit won't necessarily disqualify you.
Your credit score is probably good enough if you meet all the other requirements. The lowest FICO score you can have is a 580. (About 90% of borrowers would qualify, the White House estimates.)
Fact 6. You'll get a deal if you grab a loan with a shorter term.
If you have 25 years left to pay on a 30-year mortgage and you agree to refinance into a 20-year home loan, either Fannie Mae, Freddie Mac or FHA will cover up to $3,000 of your closing costs.
However, a shorter-term loan means you'll have higher monthly mortgage payments than you would by refinancing into a 30-year loan.