Should you refinance your home with HARP? Although the housing crisis and Great Recession is nearly 10 years old, we still receive questions from homeowners who don’t qualify (or think they don’t qualify) for a conventional refinance. While the Home Affordable Refinance Program (HARP) has some specific qualifications, it may still help some borrowers who are underwater with their mortgages.
Q: Where should I look for a refinance loan to lower my payments without redoing a 30-year loan? I heard there is a government program called HARP that can help me refinance my home if I don’t have enough equity to do a conventional loan. My current mortgage is with one of the biggest lenders in the country.
A: You seem to be asking whether you should refinance with the government program that was set up to prevent foreclosures. The Home Affordable Refinance Program (HARP) was created during the Great Recession to help homeowners avoid foreclosures and mortgage defaults.
To see whether you qualify under HARP, you can check your eligibility at HARP.gov. You’ll notice that there are two different qualifications for eligibility. On the one side, your loan needs to be backed by Fannie Mae or Freddie Mac and your loan must have been taken out no later than May 31, 2009. And, you must have little or no equity in your home and your home must be your primary residence.
On the HARP.gov website, there are some steps you can take to determine if your loan is eligible for a HARP refinance. Having said that, you might be better off checking with a mortgage lender or mortgage broker to see if you have other options, particularly if your home has increased in value.
There are quite a number of factors that go into deciding whether to refinance your loan or not. If you were to tell us that you are 25 years into your 30-year loan and didn’t want to extend the term of your loan, we’d probably suggest that refinancing is not the right option for you. In the early years of a loan, each payment is mostly interest with some reduction in principal. In the last years of your loan, you pay mostly principal and very little interest in each payment.
If your home has appreciated in value and is worth considerably more than your loan, a mortgage lender or mortgage broker can give you different options to see if a conventional refinance is an option for you.
We believe there are four parts to what we call a “home run” refinance.
First, you would ideally want to lower the interest rate you’re paying. We’d also like to see you reduce your monthly payment. Third, we’d like to see you compress the term of the loan (which is where the real savings kicks in) and finally, you’d want to carefully manage how the closing costs, so it doesn’t take too long for the savings to kick in.
If you get all four of these things, it’s a “home run” refinance. Go ahead and do it.
But, sometimes you can only get two or three of these pieces. And, if that’s the case, when do you pull the trigger?
First, a lower monthly payment shouldn’t always be the top priority unless you are in danger of not making a mortgage payment. If you’re 15 years into a 30-year loan, you should shop for a 15-year loan (or even a 10-year loan) to see if you can end up paying off your loan around the same time as your original loan. If you can do that, you’ll save yourself all the additional payments that you might make past the original end date of your loan.
The last item on deciding to refinance is how much refinancing will cost you. If the cost to refinance your loan several hundred dollars and you can get that back from the savings of the refinancing in a couple of months, it’s a great deal. But if the costs to refinance are several thousand dollars and it will take you years to get even, it might not be worth refinancing.
So, talk to a couple of local, well-regarded mortgage brokers or lenders to get an idea of how much equity you have in your property and which sort of loan programs will meet your most immediate need. Hopefully, you have enough equity to qualify for a conventional refinance, which will almost certainly be less expensive than a HARP refinance.
Good luck with your refinance.
Ilyce Glink is the Publisher of ThinkGlink.com and the Founder and CEO of Best Money Moves. Sam Tamkin is a Chicago-based real estate attorney. They co-write their Real Estate Matters nationally-syndicated column.