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New refinance option coming for low-income homeowners

A new refinance option announced April 28 by the Federal Housing Finance Agency aims to encourage low-income homeowners to refinance. (iStock)

Mortgage rates under 3 percent led many homeowners to refinance in 2020 and during the first quarter of 2021 into a shorter-term loan for a quicker loan payoff or into a new 30-year fixed-rate loan for lower monthly payments.

But homeowners with lower incomes were less likely to refinance, according to the Federal Housing Finance Agency, which estimates that more than 2 million low-income homeowners lost an opportunity to lower their mortgage payments.

Low-income homeowners may not have taken advantage of refinancing because of concern that they might not qualify for a new loan, particularly if they suffered adverse impacts from the pandemic. In addition, refinancing requires closing costs of 2 to 6 percent of the loan amount, according to Lending Tree. Those costs can be wrapped into the mortgage, but that increases the total balance owed.

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A new refinance option announced April 28 by the FHFA aims to encourage low-income homeowners to refinance. The program, which starts June 5, will allow borrowers with loans backed by Fannie Mae and Freddie Mac who meet eligibility requirements to refinance into a mortgage with a lower interest rate and lower monthly payments. To find out if your loan is backed by Fannie Mae, click here. To find out if your loan is backed by Freddie Mac, click here.

Other eligibility requirements include:

· The mortgage must be for a single unit, not a duplex or apartment building.

· The borrowers must live in the property as their primary residence.

· The borrowers’ income must be at or below 80 percent of the area median income. In the D.C. region, area median income is $126,000 for a household of four.

· The borrowers must not have missed a payment in the past six months and have no more than one missed payment in the past 12 months.

· The borrowers must have at least 3 percent equity in the home.

· The borrowers must have a maximum debt-to-income ratio of 65 percent, which compares the minimum monthly payment on all debt to their gross monthly income.

· The borrowers must have a minimum FICO score of 620.

Borrowers who use this new refinance option could save between $100 and $250 per month, according to FHFA estimates.

The refinance must save the borrowers at least $50 on their monthly mortgage payment and reduce their mortgage interest rate by at least 50 basis points. One basis point equals 0.01 percent, so 50 basis points would be a one-half of 1 percent change in the interest rate. Borrowers may be eligible for an appraisal waiver. If not, the lender can provide a maximum appraisal credit of $500 to the borrowers. The lender will be reimbursed for this by Fannie Mae or Freddie Mac. An adverse market refinance fee, which is typically charged to borrowers with a loan balance at or below $300,000, will also be waived.

When the program is available, borrowers can ask their lenders about their eligibility for a refinance.

For more information, click here.

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