A Program to Keep the Roof Over Your Head -- but It Will Cost You in the Long Run

By Michelle Singletary
Sunday, October 19, 2008

For homeowners trying to renegotiate their loans under the government's new HOPE for Homeowners program, please read the paperwork carefully -- because once again, you'll be stuck with a costly mortgage deal.

HOPE for Homeowners, nicknamed H4H, became law this summer to help keep homeowners from defaulting on their mortgages and going into foreclosure. Lenders who voluntarily allow borrowers to refinance under H4H are required to reduce the size of the mortgage to a maximum of 90 percent of the home's current appraised value. Additionally, they are only allowed to put people in 30-year, fixed-rate loans.

The Federal Housing Administration will insure up to $300 billion of these new loans. As many as 400,000 homeowners could avoid foreclosure through H4H over the next three years.

This program provides a last hope for homeowners by bringing in the federal government as their investment partner for as long as they own their homes.

I know people are desperate to keep their homes, but they need to understand that H4H is an expensive rescue program. There is a great benefit upfront -- you get to keep your home.

But there is a significant cost to homeowners at the back end. If you take this deal, you have to split the initial equity created by the write-down of the mortgage with the FHA. The government also gets a 50 percent cut of any appreciated value for as long as you own the home -- even after you pay off the mortgage.

"It's outrageous," says John E. Taylor, president of the National Community Reinvestment Coalition.

For example, let's say your home has a current appraised value of $200,000. The lender would have to give you a 30-year, fixed-rate loan for $180,000, which is 90 percent of the appraised value.

So at the start of the H4H loan, you have $20,000 in equity. If you sell the home in the first year after receiving the loan or you refinance, FHA gets 100 percent of that $20,000. If you sell after two years, FHA would get 90 percent of the equity, or $18,000. Each year up to year five, the share that FHA gets is decreased by 10 percent. After year five, you have to share 50 percent of the equity created with the new loan.

In addition to this upfront equity-sharing, if your home increases in value between the time you receive your H4H mortgage and the time you sell the property, you will share the amount of this increase with the FHA minus any closing costs and a portion of any improvements you have made. This is a 50/50 split that does not change over time.

So, staying with the previous example, if you sell your home for $250,000 in a few years, FHA would collect $25,000 (half of the appreciated value of $50,000).

There are other rules worth noting. H4H participants are also barred from taking out second mortgages unless the money borrowed is used to maintain the property.

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