Unlike a loan modification in which you are asking your current lender to modify one or more material terms of your loan, a refinanced loan is a new loan—with the same lender or a different lender. At a minimum, the refinanced loan pays off the old loan.QUALIFICATIONS
In order to qualify for a traditional mortgage refinance, a homeowner needs to have equity in their home. In California, it is rare to see a homeowner with equity in their home.WHAT IS EQUITY
Equity is what is left over after you deduct all financial encumbrances on a home against the value of the home. For instance, a home worth $400,000 has a first-secured mortgage of $200,000 and a second secured mortgage of $100,000. The two loans total $300,000. After deducting the $300,000 from the value of the home, there is $100,000 in equity.
Back in 2004, a homeowner with $100,000 in net equity would typically refinance loan #1 and pull out approximately $100,000. Thus, under a new refinanced loan, loan #1 would have a balance of $300,000 and loan #2 would have the same balance. The combined total would now equal $400,000—leaving zero equity in the home . . . until about 18 months later—when the value in the home would have grown in value.REASONS TO REFINANCE
A loan (debt) might be refinanced for various reasons:
- To take advantage of a better interest rate (a reduced monthly payment or a reduced term)
- To consolidate other debt(s) into one loan (a potentially longer/shorter term contingent on interest rate differential and fees)
- To reduce the monthly repayment amount (often for a longer term, contingent on interest rate differential and fees)
- To reduce or alter risk (e.g. switching from a variable-rate to a fixed-rate loan)
- To free up cash (often for a longer term, contingent on interest rate differential and fees)
Home Affordable Refinance Program (HARP)
If a homeowner is current on their mortgage payments and has been unable to obtain a traditional refinance because the value of their home has declined, they may be eligible to refinance through HARP.
HARP is designed to help a homeowner refinance into a new affordable, more stable mortgage. The HARP loan is a new loan and will require a loan application and underwriting process. Loan refinance fees will apply.
A homeowner may be eligible to apply if they meet all of the following:
- Have a mortgage owned or guaranteed by Fannie Mae or Freddie Mac;
- Do not have an FHA, VA or USDA loan.
- Are current on your mortgage payments and have not been more than 30 days late making a payment over the last year.
- Have a first mortgage not exceeding 125 percent of the current market value of their home.
- The refinance will improve the long-term affordability or stability of their mortgage.
- They have the ability to make the new payments.
*Eligibility criteria are for guidance only. Contact your mortgage servicer to see if you qualify for HARP.
The HARP program is offered by many servicers. Homeowners should check with their mortgage servicer (the company to which homeowners make their mortgage payments) to determine if they are participating in HARP. If their mortgage servicer is not participating, the homeowner may contact other lenders that participate in HARP to determine if they are eligible for a refinance.
Cross Over Issues Relating to Refinancing and Foreclosure
From approximately 2003 to 2008, homeowners were refinancing their home loans approximately every 18 months—the time it took to acquire additional equity in their home. The homeowner usually took out the accumulated equity for any number of reasons. Typical reasons include the following:
- Pulling money out to put a down payment on a new investment property or business venture;
- To buy a car or boat or pay off the balance of a car or boat
- Paying off credit card and/or student loan debt.
- Making improvements to the family home
- Consolidating debt
- Going on vacation
In accordance with the California Anti-Deficiency Statutes, if a homeowner has more than one refinanced mortgage, such as a second refinanced mortgage, the possibility of the second lender coming after a homeowner after foreclosure is very high because, while lender #1 enjoyed his legal right to foreclose of the property, lender #2 did nothing. In other words, Lender # 2 had not taken any steps to foreclose of the property; therefore, Lender # 2 has the legal right to sue the homeowner and collect what is owed him under the second refinanced mortgage.
For this reason, it is very important to speak with an attorney—especially if you have more than one loan.
Should you have any questions, contact Ms. Garrett at the Law Office of Linda C. Garrett to discuss your legal rights and options in connection with your distressed property.