Making Home Affordable program may enable millions to refinance mortgages

So you want to refinance your house, but it's not worth enough for you to get a good loan in the current market? A new Obama administration program is designed to fix that problem for millions of homeowners.
Here's how it works.
In the past, the federal Fannie Mae and Freddie Mac mortgage programs would only handle loans of up to 80% of your home's value, unless you bought mortgage insurance. And if you owed more than your home was worth, you were flat out of luck.
As of this month, that has changed. Through June 2010, borrowers whose loans are owned or guaranteed by Fannie or Freddie may be able to get quick refinances for up to 105% of a home's value. They must be current on their mortgage payments, but administration officials estimate that as many as 5 million homeowners qualify.
And refis are available for borrowers with credit scores as low as 620.

"This is going to create a real opportunity for millions of people to save money on their mortgages -- or replace an adjustable-rate mortgage with a fixed rate," Freddie Mac spokesman Brad German said.

The impatient can go to http://makinghomeaffordable.gov, a federal website that explains the refi program. For others, here's a look at some details and issues that are likely to be encountered.

First, the rationale for the program.

As federal interventions go, encouraging refinancings may not compare with the $182.5 billion bailout of American International Group Inc. But a homeowner with a $500,000 loan can save $476 a month by cutting a 6.5% interest rate on a 30-year mortgage to 5% -- savings that can be plowed back into the economy or can reduce the odds of foreclosure should the downturn deal the borrower a financial blow.

The historically low rates also make this a perfect time to replace a bubble-era adjustable-rate or interest-only loan with a traditional 30-year or 15-year fixed mortgage.

Switching to a fixed rate might mean higher payments initially, because of an artificially low payment on the adjustable mortgage, but guards against even higher payments in the future should rates skyrocket during an inflationary period, German pointed out.

Now, some caveats about the new refi program:

For starters, it's only for folks with solid payment histories. You're allowed to have been 30 days late on a single monthly mortgage payment once during the past year, but no more than one, and no 60- or 90-day late payments. (A separate Obama administration program encouraging loan modifications for struggling borrowers is also explained at makinghomeaffordable.gov.)