25-Year Mortgage Refinancing Option Offered
You don't often hear about 25-year mortgages, but it's one of the newest options the Obama Administration is adding to the mix under its Making Home Affordable Program.
The new option slipped through practically unnoticed when the administration announced last week that it was raising the maximum loan-to-value ratio on allowed on mortgages refinanced under the Home Affordable Refinance portion of the program to 125 percent. The administration also announced at the same time that it was also offering incentives for lenders to encourage homeowners to consider a 25-year term on their refinanced mortgage instead of the usual 30 years.
Both are intended to assist homeowners who are "underwater" on their mortgages, i.e., owe more in principal than their home is worth, due to declining property values. 125-percent limit allows homeowners to refinance despite owing more than their property is worth; the 25-year mortgage option is intended to allow them to build up equity faster in order to get back "above water" sooner.
Helps homeowners build equity faster
The 25-year option addresses a quirk in mortgage refinances. Borrowers who seek to refinance a mortgage typically have been paying on that mortgage for several years, and so many only have 24 or 26 years to go on a 30-year mortgage. But lenders are typically unwilling to refinance over such a period of time, preferring to stick with conventional-length mortgages in increments of five years, particularly 15- or 30-year mortgages.
A 25-year mortgage allows borrowers who've been paying on their current mortgage for several years to refinance at something close to their current payment schedule. It may also offer a slightly lower rate than a 30-year mortgage but not always. Lenders are sometimes reluctant to offer 25-year mortgages because the fact there are relatively few of them makes them difficult to bundle into large packages for resale to investors.
Freddie, Fannie offering incentives to lenders
To make the 25-year option more attractive, government-supported lender Freddie Mac is offering a half-percent reduction in the loan-level price adjustment it charges on loans of 20- and 25 years. Sister lender Fannie Mae is offering incentives as well. Mortgages must be owned or guaranteed by Freddie Mac or Fannie Mae to qualify for refinancing under the Making Home Affordable Program, although that is not required for loan modifications performed under the program.
The 25- and 20-year mortgage options are only available on refinanced mortgages where the loan-to-value ratio is between 105 percent and 125 percent. The former is the previous maximum loan-to-value allowed under the program before it was raised last week.
Mortgages with a loan-to-value ratio between 105 percent and 125 percent must be refinanced with the existing lender in order to qualify under the Making Home Affordable Program. Mortgages with a loan-to-value between 80 percent and 105 percent may be refinanced with any participating lender.
Wave of Home Equity Defaults Coming?
How Refinancing Can Hurt Insurance Rates