HARP 2.0 ready for refis. Will it work for you?
The government's new and improved Home Affordable Refinance Program got up and running this week.
Here's how to tell whether you might qualify for a new loan and advice on navigating the application process.
HARP 2.0, as it's been dubbed, is primarily intended to help underwater borrowers refinance into cheaper loans and stay in their homes.
Previous government refi programs, including the original HARP, have helped far fewer homeowners than expected.
That's primarily because they wouldn't allow applicants to borrow more than 125% of the value of their home's current value.
For the millions of homeowners who've seen their property values fall by a third, or even a half, that restriction was a show stopper.
But it wasn't the only problem. High fees, long processing times and restrictive regulations on previous programs also kept many people from using previous government programs.
Last fall, President Barack Obama said he was scrapping the cap on how much you can refinance in relation to your home's value.
Homeowners can refinance a first mortgage no matter how much the value of their property has declined.
Several other restrictions have been eased as well, and an automated underwriting system is being implemented to make the process easier.
In most cases, homeowners won't even need a new appraisal, although lenders may still require an automated appraisal or a drive-by, just to see if the house is still standing.
Here's how to know if you may qualify for HARP 2.0:
- 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 is to find out if your mortgage qualifies. Go to the:
- If you have an FHA mortgage, you must use the FHA Streamline Refinance program instead. The VA and the USDA also have their own programs.
- You cannot use this program to refinance a jumbo loan -- a mortgage for more than $417,000 to $625,500, depending your city. Click here to check the limits in your area.
- You must 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.
- If you've already refinanced this home through HARP, you cannot do it again unless your first refinanced loan was through Fannie Mae between March and May of 2009.
The government has swept away three restrictions that have prevented homeowners from taking advantage of previous refinance programs:
- There are no income limits. You can earn as much as you want and still qualify.
- You don't 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.
- Borrowers are not required to document that they have enough income to support the new payments unless their new payments are more than 20% higher than the old payments. You could be unemployed and still get refinancing.
This raises an important point. How could the payments on a loan with the same balance and a lower interest rate ever be higher?
The program encourages homeowners to refinance into shorter-term loans by lowering some fees and waiving others altogether for loans of 20 years or less.
Although the monthly payments could be higher, you'll save tens of thousands of dollars in interest costs and pay off your home more quickly.
However long you choose, expect to pay a little higher than average interest rates for a HARP refinance.
"Yes, HARP could ... translate to a higher rate," says Lee Miller, a mortgage broker in Kauai, Hawaii. "But by higher, I mean, maybe 4 or 4.25% as opposed to 3.875 to 4.0%."
Other lenders also have suggested interest rates may be higher, though some say they will be the same as for non-HARP loans. Each case is priced on its merits, says Miller. The less risky your loan, the lower your interest rate is likely to be.
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 worth only $175,000, so their loan-to-value ratio is 142%.
That is way more than the 80% ratio they'd need for a conventional refinancing and even more than the 125% limit that had been in place with the original program.
Taking advantage of the program's new rules could allow them to make the following choice. They could refinance into:
- A 30-year loan at 4.5% that would lower their mortgage payments to $1,266, saving $314 a month.
- A 20-year loan at 4.0% that would cut their payments to $1,515, saving $65 a month and reducing their total interest payments over the life of the loan by 45% over a new 30-year mortgage.
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.
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.
If you aren't paying for private mortgage insurance now, then you won't be forced to buy it if you refi through this program, no matter how far you're underwater.
If you're currently carrying PMI, you'll have to keep it, but the premiums will not increase.
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.
You cannot consolidate the two mortgages into one.
Many second lien holders have refused to cooperate 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 in the past were working with primary mortgages worth no more than 125% of their property's current value.
They may see an advantage to the first mortgage now having a lower interest rate. After all, that should increase the chances of the homeowner continuing to make payments on both mortgages.
Time will tell.
To refinance, contact your lender or any other bank that participates in the program. Be ready to tell them whether your loan is held by Fannie Mae or Freddie Mac.
You're not limited to just your current lender. Compare rates and fees at different lenders.
This program runs through the end of December 2013.