Lower-income homeowners could benefit from a new refinance program being launched by the U.S. government.
Starting this summer, eligible borrowers will be able to refinance their mortgage at a reduced interest rate and lower monthly payment, saving an estimated $100 to $250 a month, according to the Federal Housing Finance Agency, which oversees mortgage-backers Fannie Mae and Freddie Mac.
“Last year saw a spike in refinances, but more than 2 million low-income families did not take advantage of the record low mortgage rates by refinancing,” said the agency’s director, Mark Calabria, in a public statement.
“This new refinance option is designed to help eligible borrowers who have not already refinanced save between $1,200 and $3,000 a year on their mortgage payment,” Calabria said.
With mortgage rates reaching historical lows in 2020, refinancing activity reached roughly $2.6 trillion for the year, according to Freddie Mac. That marks the highest annual total since 2003, when $3.9 trillion in refinancing was recorded.
The average rate on a 30-year fixed mortgage is 2.95%, according to real estate site Zillow. For a 15-year loan, the average rate is 2.13%.
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To be eligible for the new refinance program, borrowers must have a mortgage backed by Fannie or Freddie for their house — which they must live in — and have income at or below 80% of median income in their area. They also must have missed no payments in the previous six months and no more than one in the previous 12 months.
Additionally, their mortgage can’t have a loan to value ratio above 97% and they must have a debt-to-income ratio below 65% or a FICO credit score of at least 620.
Lenders, meanwhile, would be required to reduce the borrower’s monthly mortgage payment by at least $50 and a 50-basis-point reduction (half a percentage point) in their interest rate.
Additionally, lenders — which will have the choice to participate in the program — would need to waive the current adverse market refinance fee for borrowers whose loan balance is no more than $300,000. And if the borrower is ineligible for an appraisal waiver, the lender would need to provide a credit of up to $500.