As a general rule, lenders won’t refinance a mortgage that is underwater (owe more than the home is worth).  Even if you have a small amount of home equity, you may not be able to refinance, and certainly won’t be able to get very favorable terms on that mortgage.  Enter the federal Home Affordability Refinance Program (HARP).  This program is designed to help underwater and nearly underwater homeowners refinance into today’s lower interest rates.  It doesn’t forgive any of your loan balance, but it does help you get a lower rate.  However, it expires at the end of 2013, so if you’re eligible, now’s the time.

Eligibility Criteria

  1. You can’t be behind on your mortgage and have to have made 12 months of on-time payments.
  2. The mortgage must have been sold to Fannie Mae or Freddie Mac before May 31, 2009.
  3. Your loan to value MUST be greater than 80%.  There is no maximum for fixed mortgages, but if you want an ARM the maximum is 105%.
  4. You have to be able to reasonably afford the new mortgage (if you’re making payments on time on your current mortgage, this shouldn’t be an issue.)
  5. You can only refinance through HARP once.
  6. You must live in the home (no investment properties) [Update- Looks like you can do investment properties- see comments section].

Why Refinance?


The point of HARP is to make your payments smaller.  This is done by giving you a lower interest rate and a longer term.  For example, if you are 5 years into a 30 year 6% mortgage, you may be able to lower the rate to 4% and extend the loan term back out to 30 years.  On a $200K loan, this would lower your principal and interest payments from $1289 a month to $955 a month.  You don’t have to extend the term though, you could refinance into a 15 year mortgage.  If you could get a 15 year at 3.5% on that same $200K loan, your payments would be $1430 a month, but you’d have the loan paid off 10 years sooner.  HARP does NOT allow you to take any cash out, although most people using the program don’t have any cash to take out anyway since they’re underwater.  You’ll still need to pay the closing costs on the loan, but you may be able to opt to take a higher interest rate to make it a “no-cost” loan or add the closing costs onto the loan balance to make it a “no-cash” loan.

Who’s Paying For This?


You may be asking yourself why banks are willing to give you a lower rate when they’ve got you locked into a high rate you can’t refinance.  The reason why is that the bank makes money every time you refinance.  Some are estimating that banks will have more than $12 billion in revenue from HARP loans this year.  Remember that the bank doesn’t hold your mortgage, investors do.  So when you refinance your loan, the bank pays off the old, high-interest loan (the investor’s bond is called), and then sells off the new loan to the same investor at a lower rate.  Just as the Fed’s low short-term interest rates punish savers to help borrowers, so the Federal HARP punishes investors and rewards borrowers.

What should I watch out for?

Basically, this refinance is just like any other.  You don’t have to go to your current lender (a change from the original HARP).  You have to pay closing costs.  You should shop around to get the best rates, lowest fees, and best terms.  You still have to go through underwriting.  You may or may not have to pay for an appraisal.  Many banks have been accused of charging higher rates or more fees for HARP refinances than for non-HARP refinances.  What did you expect?  Would you loan to someone that is underwater at the same price as someone that isn’t?  Of course not.  But that doesn’t mean you still can’t shop around and compare.  Competition lowers prices.  Remember also that refinancing isn’t always a good idea, especially if you’re selling soon.  You might not have time to recoup the closing costs with savings on interest.

In short, if you’re stuck in a high interest rate mortgage because you’re underwater or close to it, take a close look at HARP and shop around for a HARP refinance.