The Obama administration uncovered its plan to help homeowners refinance their mortgages with historically low rates. The plan would allow homeowners current on their mortgage to save an average of $3,000 a year by refinancing into loans backed by the Federal Housing Administration (FHA). The plan would cost between $5 and $10 billion and in order to not add to the deficit, the administration wants to impose a fee on large banks.
The plan would also require lenders to take a “haircut” of their loans by reducing the principal owned by borrowers who owe over 140% of their home values (underwater). If a borrower previously had a $200,000 balance for a standard 30 yr. mortgage, they could save around $216 a month in payments. Another option would be for homeowners to opt into a program that offers borrowers to refinance into 20 year loans, this will not reduce payments but could build home equity more quickly.
The difference between this plan and other policies implemented during the Obama administration is that the latest proposal would help homeowners who were underwater with private loans obtain new refinanced loans. In order to qualify, borrowers must have paid their mortgages on time for six months and no more than one late payment in the six months prior to that. Their credit score must also be above 580, which according to the administration 9 out of 10 homeowners meet the last criteria.