The Obama Administration has taken dramatic action to help the U.S. out of its current economic slump. Their mortgage refinance plan, for example, is designed to help people capitalize on low interest rates. However, this loan modification program isn't available for everyone.

One of the objectives of the new Obama Administration mortgage refinance plan is to generate some cash flow in the economy by allowing people with good credit to take advantage of low interest rates. The "Making Home Affordable" mortgage refinance program aims to help people who have been hit hard by slumping home values without rewarding people mired in excessive debt.

Declining values no red light for mortgage refinance

The "Making Home Affordable" loan modification program will let people refinance their homes even if they're in areas where home values have declined. Let's say, for example, that several years ago, you took out a 6 percent, $250,000 mortgage to buy a $300,000 home, and used a $50,000 down payment to finance the rest of the deal. Today, that home might be worth only $250,000 because of the down market.

Under previous rules by Fannie Mae and Freddie Mac, you wouldn't be able to refinance to lower mortgage rates, because you'd be at 100 percent loan-to-value (LTV). The "Making Home Affordable" mortgage refinance program will now allow you to refinance that loan. The balance of your loan simply can't exceed your property value by more than 5 percent.

Credit scores won't play as big a factor in a loan modification, either. No credit score has yet to be established as the low end of the acceptable range. However, a homeowner must have made mortgage payments on time during the preceding 12 months prior to applying.

The Obama plan seems to be reaching out to people who need more cash in depressed areas. However, their strict cutoff for LTVs (105 percent) implies that the administration isn't going to provide a handout for people who ran up their credit cards and home equity loans.

Private and second mortgages, closing costs

High LTV ratios are just one of the benefits. Private mortgage insurance (PMI), which is required for homes that have LTV ratios higher than 80 percent, has been waived for a mortgage refinance. If you currently have a loan that didn't have PMI, you won't be required to purchase the insurance, even if your LTV is higher than 80 percent.

Refinancing costs will also ease. Fannie Mae will allow the costs to be rolled into the balance of the refinanced loan, while Freddie Mac will limit the charges, including escrow fees, appraisals, lender fees, and closing costs, to $2,500.

Making homes affordable has long been a grandiose goal of U.S. governments, but the Obama Administration is taking a slightly difference approach. Not only is it trying to help homeowners, but it's also looking to put extra money back into the economy. Only time will tell if its two-pronged approach will be successful.

Published on May 6, 2008