Government refi program ditches limits on underwater homes

House floating on blue water

President Obama is revamping his biggest refinancing program in another effort to reach more homeowners locked in high-cost home loans.

The Home Affordable Refinance Program (HARP), part of the president's foreclosure prevention effort, was supposed to get 5 million borrowers into cheaper and safer mortgages.

But so far, fewer than 900,000 properties have been refinanced through the program, mostly because homeowners weren't allowed to borrow more than 125% of the value of their homes.

After property values fell an average of one-third across the country, and dropped a lot more than that in the hardest-hit cities, many borrowers who needed help the most were so far underwater they couldn't qualify.

So on Monday, the president scrapped the cap on how much you can refinance in relation to your home value.

That should open the program up to about 4.7 million of the 11 million borrowers who are underwater on their mortgages and owe more than 125% of their home's current value, according to CoreLogic, which analyzes mortgage data.

Homeowners can now refinance a first mortgage regardless of how far their home value has dropped.

In most cases, they won't even need a new appraisal.

To qualify, your current mortgage must have been purchased or guaranteed by Fannie Mae or Freddie Mac -- the big government-owned companies that provide most of the money for home loans in this country -- prior to June 2009.

The first step toward taking advantage of HARP is to find out if your mortgage qualifies. Go to the:

Fannie Mae website or call 800-7FANNIE, 8 a.m. to 8 p.m. ET.
Freddie Mac website or call 800-FREDDIE from 8 a.m. to 8 p.m. ET.

You must also be current on your mortgage, meaning no payments were more than 30 days late in the past six months and no more than one payment was late in the last year.

That's an improvement over the previous rules, which rejected applications with any late payments over the last year.

Borrowers must also be able to document that they have enough income to support the new payments.

But we expect lenders will go easy on requirements for minimum credit scores and waive the need for private mortgage insurance as long as your current mortgage does not require it.

Another key change to HARP is that it encourages homeowners to refinance into shorter-term loans.

The government is lowering some fees and waiving others altogether if borrowers take out loans of 20 years or less.

By refinancing with a lower interest rate at the same time as you sign up for a shorter loan, you can save tens of thousands of dollars in interest costs and pay off your home more quickly.

Whichever option you choose, expect to pay a pretty average rate for that term.

Let's say a family owes $250,000 on a loan that charges 6.5% and requires them to pay $1,580 a month in principal and interest.

They would have liked to refinance before, but their home is only worth $175,000, so their loan-to-value ratio is 142%.

That is way more than the 80% they would need for a conventional refinancing and even more than the 125% limit that had been in place with HARP.

Taking advantage of the program's new rules could allow them to make the following choice. They could refinance into a:

You can use our mortgage calculator to determine the monthly payments for the exact amount you want to borrow with this or any home loan.

Or put our 15-year vs. 30-year mortgage comparison calculator to work to see how much money a shorter mortgage might save you.

It's also possible to refinance into an adjustable-rate mortgage using HARP.

But fixed-rate loans are so cheap, we don't know why you'd want to do that, plus loan limits still apply for ARMs.

You can borrow no more than 105% of the value of your home under HARP with an ARM.

You do not have to live in the house or condo you're borrowing against. This is the first government program that will help you refinance vacation and investment properties.

If you've already refinanced your home through HARP, you cannot do it again unless your first refinance loan was through Fannie Mae between March and May of 2009.

This new, improved program should be available by December 2011. It has been extended to run through the end of December 2013.

To refinance through HARP, contact your lender or any other bank that participates in HARP. You don't need to pay a third party to help you, despite advertisements you may have heard.

The big question no one can answer is what these changes will mean for borrowers who not only have a first mortgage but a second mortgage, such as a home equity loan, against their property.

Many second lien holders have refused to cooperate with HARP and accept new primary mortgages on underwater properties.

And if a second lien holder won't subjugate its note to a new primary mortgage, the deal is off.

Even those second mortgage holders who have cooperated with HARP in the past were working with primary mortgages worth no more than 125% of their property's current value.

How will those borrowers feel about new primary mortgages for homes with even bigger loan-to-value ratios?

No one knows.

But if you have a second mortgage, figure that this is an issue that will almost certainly come up -- and that you'll have to overcome.

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