There is finally good news for the millions of homeowners who find themselves under water on their mortgages. On Wednesday the nation’s largest provider of home loans, Bank of America, announced new steps to forgive some mortgage principal to keep homeowners out of foreclosure.

Unlike past program which have focused on restructuring loans to make monthly payments more affordable, Bank of America’s move is one of the first to focus on where the real problem lies: lower home values. Many consumers who bought homes at the height of the housing boom a few years ago now owe tens of thousands of dollars more on their mortgages than their house is worth – a situation known as being under water on your loan.

An increasing number of borrowers have come to realize that the only option available to them is to walk away from the home and completely stop paying the mortgage. The thinking goes: why keep paying off a mortgage on a home that may never get back to its previous value, especially when the option to rent is so much cheaper? These consumers have decided that waiting until their credit records recover and then stepping back into the housing market makes more sense than sticking it out.

The problem for banks like B of A is that each homeowner that walks away from a house costs the bank tens of thousands of dollars in carrying and remarketing costs. Banks are making the calculation that taking some losses now is better than even bigger losses down the road if the housing market continues to deteriorate.

Under the B of A pilot program, a select number of homeowners would have a portion of their principal reduced – in effect acknowledging the fact that the house is now worth less. With a lower principal comes a smaller mortgage and less costly mortgage payments.

The Bank of America offer is now only available by invitation only, but there is widespread hope that this pilot program will be expanded to the millions of homeowners who hold mortgages from the bank. B of A’s leadership on this issue may also encourage other banks to follow suit.

If there is a widespread adoption of reducing principal and not just restructuring over valued mortgages, it could put a real dent in the foreclosure crisis. That is turn would boost the overall housing market which is being dragged down by the excess inventory of foreclosed homes.

The bottom line: if you’re currently facing foreclosure this program will probably not roll out fast enough to help you unless you are one of the lucky few that Bank of America invites to participate. But if you can hang in there a little longer help may finally be on its way.

photo credit: mrkathika

Freddie Mac, one of the two main government-sponsored institutions that set lending standards for home mortgages announced recently that it will be phasing out interest-only loans. This is expected to drastically shrink the number of interest-only mortgages available to consumers.

Freddie Mac has already begun the phase-out after losing money on the loans over the last three years. Nearly one in five interest only loans that Freddie Mac holds are at least three months delinquent. Fannie Mae has also incurred big losses on these types of mortgages but the company has not yet said whether it will phase them out as well.

While smaller lenders say they will continue to make interest-only mortgages available, the lending standards are getting a lot stiffer. Typically consumers select a fixed-rate or variable-rate mortgage and pay only the interest on the loan or the first 10 years, after which they pay for principal and interest for the next 20 years.

Borrowers with good credit can get adjustable-rate interest-only mortgages with a 4.5 percent interest that is fixed for five years. The rate then increases a maximum of five percentage points over the next five years. Under the new tougher lending standards a consumer would have to prove they would be able to pay the fully indexed rate of 9.5 percent.

As a result of the new standards, interest-only mortgages are considered a good fit for only wealthy individuals who need flexibility in their cash flow and who do not intend to own their home for long.

The bottom line: Interest-rate mortgages are not for everyone. If you are considering this type of loan be sure you can meet they monthly payments once the principal portion of the mortgage kicks in, most likely at a higher rate.

photo credit: seier+seier+seier

Reverse mortgages, also known as a Home Equity Conversion Mortgage or HECM loan, allow you to take money out of your home without the burden of a monthly payment. These types of loans are safe and government-insured by the Federal Housing Administration (FHA), a division of the Department of Housing and Urban Development (HUD).

Probably the biggest “pro” in reverse mortgages pros and cons is the fact that seniors who use these loans can live the rest of their lives in a home with no mortgage payments. There are no credit checks and your home can be financed or owned free and clear to qualify for this program. As a borrower you can choose to get your money out in one lump sum or as a line of credit. Unlike typical home equity lines of credit, a reverse mortgage line cannot be closed if your income or property’s value dips.

Of course, when you are thinking about reverse mortgages pros and cons there are always pitfalls and disadvantages to this type of loan. First, reverse mortgages tend to be quite expensive. There are numerous fees and insurance costs associated with reverse mortgages and in some cases homeowners could be paying as much as $18,000 in up-front payment. These fees are usually added to the loan balance so you will not have to pay them out of pocket, but you will be paying interest on that extra amount, so it can get expensive over time.

In the reverse mortgages pros and cons balance sheet, another “con” is the effect that receiving the extra money can have on your eligibility for certain programs. If a large lump sum gets added to your bank account as a result of a reverse mortgage you may no longer be eligible for Medicaid and other need-based programs. Also, when you have a large sum of money in your account you become a potential target for scammers who want to sell you bad investments, so beware.

If you are considering taking this step keep in mind the reverse mortgage pros and cons discussed here. Reverse mortgages can be a great option for some seniors, but only proceed once you know exactly what you’re getting yourself into.

These low home loan rates, combined with the federal tax credit for first time homebuyers drove up the number of signed home sales contracts for the seventh straight month, the National Association of Realtors reported. The association said that its index of sales agreements rose 6.4 percent from July to 103.8, beating forecasts. The index was 12 percent higher than a year ago, matching similar reporting on home sales from the Case-Shiller home sales index.

The decline in mortgage rates is significant in that the economy appears to be picking up steam, leading many analysts to predict interest rates would start to rise. This clearly hasn’t happened yet, as last week’s rates were the lowest since May when it was 4.91 percent. Mortgage rates hit their record lowest point of 4.78 percent in the spring.