Key facts about the federal loan modification program

NEW YORK — It's welcome relief for homeowners struggling with mortgage payments.

The new federal program to let people refinance or modify their mortgages is expected to help millions of Americans lower monthly payments and avoid foreclosure. So what strings are attached?

You might be concerned about the impact to your credit report or the tax implications, for instance. Others who are still paying low introductory rates might fear their monthly bills could skyrocket.

Here are some questions and answers on concerns people might have about the Making Home Affordable program.

Q: How will my credit profile be affected?

A: Refinancing generally doesn't affect your score since it's simply a rewritten mortgage, according to Norm Magnuson of the Consumer Data Industry Association, a trade group based in Washington.

This is especially true of refinancing under the federal program, since one of the terms of eligibility is that homeowners can't have missed a payment in the past year.

It's not yet clear what impact a federal loan modification — an adjustment to terms of an existing mortgage, rather than a new one — will have on credit profiles, however, Magnuson said. Regulators haven't yet determined how the loan modifications will be reported, if at all.

If you're applying for a loan modification under Making Home Affordable, it means you've already missed payments and hurt your credit profile. A loan modification should improve your credit profile in the long run since the idea is to get you on track for meeting payments.

It might also free up money to pay off other debts.

Q: Is it possible my payments will be higher?

A: If you're still paying a low, introductory rate, it's possible your monthly mortgage payment will increase slightly under the federal refinancing program. But the idea is to avoid the big interest rate spikes that typically come with adjustable-rate mortgages.

After applying for the Making Home Affordable program, your lender should give you a "good faith estimate" that includes your new interest rate, mortgage payment and the total cost of the loan. Compare the numbers with your current loan; you might decide that refinancing isn't an improvement.

You can also check out the payment reduction estimator on the government's Web site at www.makinghomeaffordable.gov.

Q: Should I wait to see if mortgage interest rates come down in a couple of months before applying?

A: Probably not, since mortgage rates are at historic lows.

Recently rates on 30-year mortgages inched upward to 4.87 percent, but that's still close to the lowest level in decades. Waiting for the rate to go any lower might backfire, said Ken Inadomi, director of the New York Mortgage Coalition.

Even introductory rates shouldn't be that much lower than fixed rates these days — in some cases, they may even be higher. So it's probably in your best interest to apply for refinancing now.

In case you decide to wait: The Making Home Affordable program expires on June 10, 2010.

Q: What are the tax implications?

A: Charges for refinancing a mortgage are tax deductible. That cost should be evenly divided to be deducted over the life of the mortgage, Inadomi said. Other costs, such as attorney or appraisal fees, are not deductible.

You'll also have to adjust your mortgage-interest deduction if you get a lower rate.

Q: Can I try to refinance or modify my mortgage on my own, without going through the program?

A: Working directly with a lender shouldn't be a problem if you think you're not eligible for the federal program. Just beware of getting a third party involved, especially if they ask for an upfront fee.

Government officials have recently warned homeowners of scammers that charge fees of $1,000 to $3,000 to help with loan modifications. Officials say such operations almost always are fraudulent, and that help is available for free from government-approved housing counselors.

Officials said the scams often go by official-sounding names designed to make borrowers think they are using the Obama administration's program.