More Hoops for Borrowers

In September, the program started offering subprime borrowers who were late in their payments the option of refinancing into FHA-insured loans -- but only if they had made payments on time for six months before their loans reset to higher rates, and if their mortgages reset between June 2005 and December 2009. Previously, the FHA did not insure loans for late borrowers.

The FHA does not make loans; it provides mortgage insurance to borrowers through a network of private lenders. Those lenders will consider only borrowers who have at least 3 percent equity in their homes and who can verify their incomes.

About 141,000 borrowers have applied to the new program, said Steve O'Halloran, an FHA spokesman. The agency has approved 45,000 of those applications and is on target to help a quarter of a million families refinance by the end of 2008.

The administration and some of the nation's largest lenders also proposed a plan recently to temporarily freeze interest rates for some at-risk adjustable-loan borrowers. Countrywide Financial, the nation's largest mortgage lender, had previously said it hoped to refinance or modify $16 billion in mortgage loans held by about 82,000 borrowers.

Aside from these refinancing plans, the House and Senate have approved legislation that would lower the down-payment requirements on FHA-insured loans. The legislation would also raise the limit on the size of loans the FHA can insure from $362,000 to $417,000 in states with high home prices. The two chambers must now reconcile their versions of the measure before sending it to the White House for the president's signature.

"We think this bill can help 200,000 more people refinance," O'Halloran said.

Rarely does the FHA offer insurance for adjustable loans. "We back the 30-year, fixed-rate, garden-variety, plain-vanilla mortgage," FHA Commissioner Brian Montgomery recently said.

Adjustable Loans Still Exist

But the adjustable-rate mortgages that have been so closely linked with foreclosures are still widely available and can be a good fit for some borrowers, said Gumbinger of HSH Associates.

Adjustable loans generally carry lower interest rates than fixed-rate loans written at the same time. That makes them suitable for someone who plans to move before the rate adjusts.

These loans may also be the only choice for people who need jumbo loans, the ones exceeding $417,000.

Jumbo loans are not nearly as risky for lenders as subprime loans, but they are classified as nonconforming because Fannie Mae and Freddie Mac are prohibited from buying them. When investors yanked their money out of the nonconforming market, some firms specializing in jumbo loans shut down, stopped making those loans or got more selective. Many reacted by simply raising their rates.

That has led to a widening gap in the cost of jumbo and conforming loans in recent months, making the former more expensive.

Lenders were charging an average 7.02 percent interest for prime 30-year, fixed-rate jumbo loans last week, compared with 6.20 percent for conforming loans, according to HSH Associates.

That rate may not be exorbitant by historical standards. "But it may be more than your budget will allow," Gumbinger said. "So you may want to consider an adjustable loan," such as one with a fixed rate for five years that adjusts each year thereafter. This so-called 5/1 adjustable loan could give borrowers a break of half a percentage point or more from the 30-year, fixed-rate loan. But if you get an adjustable-rate loan, stay tuned to market conditions to see if an opportunity to refinance comes along, Gumbinger advised.

Before deciding on an adjustable loan, shop around, Gumbinger said. These 5/1 loans are available from plenty of what are called portfolio lenders -- lenders that plan to keep the mortgages rather than sell them to investors.

But there's a wide range of pricing in a given marketplace -- from less than 6 percent to more than 8 percent on 5/1 jumbo adjustable loans at one point this month. It all depends on what kind of loan the lender is interested in having in its portfolio at a given time.

"Some lenders are actively pushing to get business in their door," Gumbinger said. "Others prefer to be less aggressive."