BEGINNING IN APRIL 2009, President Obama’s Making Home Affordable loan modification program began offering struggling homeowners the opportunity to modify the interest rate on their mortgages. The program achieved moderate success, modifying more than a million loans over a roughly five-year period. More than 300,000 of these modifications occurred in California.

The modifications were billed as permanent, but in truth they were only partially permanent.

In most cases, homeowners were given a drastically reduced rate of 2 percent for an initial period of five years. After the initial five years the loans will begin to adjust, up to 1 percent a year, until they reach the average interest rate that was being charged at the time the homeowner entered into the modification agreement.

As these “permanent” modifications begin to adjust, some homeowners will be looking at significant increases in their monthly payments. Consider an example: The principal and interest payment on a $300,000 mortgage at 2 percent is $1,109. Bump that up by 1 percent and the new payment is $1,264 — and that is just the first adjustment.

If the homeowner in this scenario entered into the modification in 2009 when rates were averaging around 5 percent, they would continue seeing their payments increase for two more years until they reach the average rate at the time of their modification. The homeowner with a current principal and interest payment of just $1,109 will see their monthly payment increase to around $1,610, a $500 increase over a three-year period. Keep in mind that the loan used in this scenario is $300,000; in many high-cost areas of California, mortgage amounts are much higher than that.

As we see these mortgage payments rise, certainly there is reason to be concerned. But are there options for homeowners facing significant increases in their monthly housing expenses?

The first thing to consider is how long a homeowner plans to keep the property. Since we tend to live in a mobile society, it is not out of the question that a homeowner may be ready to sell a property and move on by this time. With increasing values over the last two years, many homeowners who did not have sufficient equity to consider moving a few years ago may be able to consider doing so now.

If a homeowner is planning to keep a property, refinancing into a new loan might be a solution. This could potentially help to keep payments lower, even if the rate on their new loan is higher than their current modified rate. This would be the result of the magic of amortization: If a homeowner has been paying down the principal, the new loan will be for less than their original loan, resulting in a lower payment, not as the result of interest but as a result of the lower loan amount.

As an example, let’s say this homeowner who modified in 2009 actually took out the original mortgage in 2007. They have now been paying on this mortgage for seven years and owe just $250,000 from the original $300,000. By refinancing the $250,000 they currently owe at a fixed rate of 4.5 percent, the new payment would be $1,266. Of course, the downside to this is that you’re adding seven more years to the length of time you have to make payments.

For homeowners facing significant increases to their monthly payments, there certainly could be a crisis on the horizon. But there are options available to these homeowners that they did not have when they modified their loans. If you are one of these folks with a modified mortgage, the worst thing you can do is put your head in the sand. The best thing you can do is talk to a professional who can offer you unbiased assistance in reviewing your circumstances.

Now, as always happens whenever I mention interest rates in my column, my compliance folks begin to get nervous. So please know that this column is intended for informational purposes only. Any reference to interest rates or loan terms is for illustrative purposes only and is certainly not an offer to lend.

Guy Benjamin (CA BRE License #01014834) writes a weekly column for The Herald. Readers may contact him at 707-246-0949 or gbenjamin@rpm-mtg.com.

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