Refinancing to Avoid Foreclosure on a Home

I saw a report today that said more than 80,000 homes in the U.S. were foreclosed upon last month (September). As these trends continue, there will also be an increase in the number of people refinancing to avoid foreclosure on their homes.

But how does this process work? How can a homeowner refinance to stop a foreclosure process? And what types of obstacles are there, due to the current economic crisis.

These are the questions we will examine in this blog entry. Let’s take them one at a time:

How Can You Refinance to Stop Foreclosure

Many of the people who are at risk of being foreclosed upon have adjustable-rate mortgage loans (ARMs) that will adjust in the near future. Of those folks, a large percentage came into their ARM loans with bad credit. The lender offered them a low “teaser rate” and, in many cases, downplayed the risk associated with future interest rate increases.

We know the rest of the story. Millions of these homeowners had “payment shock” when their loans reset to much higher rates — and that, more than anything else, is what has fueled these record-breaking foreclosure rates across the U.S.

This is one of primary reasons so many people are refinancing their mortgage loans right now (or at least trying to). In many cases, it’s a desperate attempt to avoid foreclosure on their home, resulting from an enlarged mortgage payment. If a homeowner can refinance to a more affordable loan with a fixed interest rate, they could prevent this kind of payment shock and therefore stop the foreclosure process before it starts.

Refinancing Roadblocks You May Face

Refinancing to avoid a possible foreclosure sounds like a great idea, in theory. But in practice, it may not always work. Homeowners who want to refinance their mortgage loans face unique challenges right now, as a result of our troubled economy.

For one thing, house values have dropped in many areas of the country. In places like California, where the values may have been artificially inflated to begin with, they fell significantly. This can make it hard to refinance your home, because you cannot replace a bigger loan with a smaller one. In other words, a lender cannot offer refinancing terms that replace your current mortgage loan if your home value has dropped below the amount you still owe.

So in this scenario, we have a double-edged sword. The homeowner tries to refinance to avoid a possible foreclosure on the home, but the depressed property value makes it hard to do. For people in this situation, there is very little advice I can offer. But there may be a ray of light for you, in the form of a new FHA program for at-risk homeowners.

The Federal Housing Administration (FHA) has a new program called Hope for Homeowners, or H4H for short. This program is designed to help people avoid foreclosure by refinancing out of an ARM loan and into a more affordable fixed-rate mortgage loan. The new program just went into effect this month, October 1st to be exact. It goes until September 2011. They have some specific qualification criteria, though, so it’s not available to everyone trying to refinance their homes. You can find out if your qualified for the program by clicking the “Quotes” tab at the top of this blog, and then looking for the FHA link.