The U.S. government keeps throwing good money after bad in an effort to help homeowners stay in their homes. The latest is an additional $3 billion to help unemployed homeowners. This is obviously a worthy goal. It’s good for homeowners to keep their homes and it’s good for the entire economy to avoid more foreclosures. Unfortunately the way it’s being implemented is less than ideal.

Take the $50,000 zero interest two year loan. If you are an unemployed homeowner having trouble making your payments, applying for this loan is a no brainer. You don’t stand to lose anything. You might keep your home in the long run, you might just keep a roof over your head for now. Fast forward a year or two. You now have a job and are trying to get your finances back in order. Assuming that home prices haven’t increased significantly by then (which is the most likely scenario), you are still upside down on your mortgage, plus you owe an additional $50K. Your first loan is still at a high interest rate because the decreased home value prevents you from refinancing. You have a choice. Work for years to dig your way out by paying off the $50K loan and making payments on your mortgage, or walk away from the house and start over. For many, many homeowners, walking away will be the smarter move. They’ll declare bankruptcy or simply default on both loans and rent until their credit has recovered enough to buy again. Either way, the $50K loan was a bandaid that just delayed the foreclosure for a couple of years.

There is a better solution. Interest rates are at historic lows, but people can’t refinance because they don’t have sufficient income to qualify and/or the home’s value is lower than the loan amount. We should change the refinancing rules so that some of these homeowners can refinance their existing loans.

But someone has invested in these mortgages. It’s not fair, or smart, to take money away from them to give to the homeowner. Let’s look at these loans from the investor’s point of view. In the case outlined above, the loan has a high interest rate and its balance is higher than the home’s value. Whether or not the homeowner has sufficient income, this loan has a high chance of defaulting. If that happens, the investor will recover much less than the original cost of the loan.

What if the homeowner was able to refinance the same loan balance at an interest rate below 5%? If he goes through the standard loan qualification process and shows the income necessary to make the payments, there’s a very good chance that he will not default. Wouldn’t this be preferable to the investor?

This does not address the problem of the homeowner who doesn’t have the income to payments at the lower interest rate. Quite honestly, those loans are going to fail sooner or later no matter what you do. Saving those that can be saved will be good for the economy as a whole and doesn’t involve any taxpayer money. Just change the rules to remove a roadblock that shouldn’t be there.

Author Bio: This is an excellent time to get a refinance home loan because interest rates are well below 5%. These great rates are available if you’re buying San Diego new homes.

Category: Real Estate
Keywords: refinance, real estate, finance, mortgage rates