The HARP refinance was created specifically to enable homeowners who are “underwater” on their mortgages to refinance. Traditionally, homeowners are only eligible to refinance if their mortgage if the loan balances are lower than the value of their homes. But after the Financial Meltdown that began in 2008, property values fell across the country. This put millions of homeowners in negative equity positions, making them ineligible to refinance. HARP was a government solution to that problem.
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What is HARP?
HARP is short for Home Affordable Refinance Program. The program was launched by the Obama Administration, in March of 2009 at the bottom of the housing crisis. It enabled homeowners to refinance into lower interest rate mortgages, even though they had no equity or negative equity in their homes.
As an example, let’s say you purchased your home in 2005 for $300,000. By 2010, you still owed $250,000 on the home, but the property value had fallen to $200,000.
Under traditional mortgage lending guidelines, you would be completely unable to refinance the original mortgage, due to the negative equity situation. But under the HARP program, you would’ve been permitted to refinance.
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This was especially important because mortgage rates fell considerably after the meltdown. The ability to refinance from a rate of, say, 7%, into a new loan at, say, 4.5%, enabled homeowners to dramatically reduce their monthly payments.
The program didn’t erase the negative equity situation. But it did enable homeowners to stay in their homes long enough to both a) pay down their mortgage balances, and b) take advantage of any eventual increase in property values.
The result of the program was that millions of homeowners were able to avoid foreclosure. The program continues today for the benefit of those who are still in precarious positions with their home financing.
HARP Eligibility Requirements
The HARP refinance program is designed specifically for people who have conventional mortgages (as opposed to FHA and VA mortgages). HARP loans are available at participating mortgage lenders, and have the following requirements:
- Your mortgage must be held by either Fannie Mae or Freddie Mac.
- It must have been originated and closed before May 31, 2009 (as evidenced by the closing date listed in your mortgage documents).
- You haven’t used the HARP refinance program in the past.
- You’re “upside down” on your home – which means either the property has declined in value, you owe more on the property than it’s worth, or you have very little equity.
- You can have no more than one 30-day late on your mortgage within the past 12 months, and none in the past six months.
When Does a HARP Refinance Make Sense?
If you meet the above qualifications, a HARP refinance can make sense in a wide variety of situations. Examples include:
Interest rate reduction refinance. Generally speaking, a lower interest rate will translate into a lower monthly payment. As well, if your current mortgage has 20 years remaining, and you refinance into a new 30-year loan, that should also lower your payment. That will make the payments more affordable.
Convert from a variable rate mortgage to a fixed rate mortgage. Many of the mortgages taken before 2009 were adjustable-rate mortgages, or ARMs. Borrowers were often lured by interest-only loans, that were typically ARMs. They offered very low initial payments, but once the interest-free term ended, the payments were disproportionately higher.
If you have such a loan, you can use a HARP refinance to convert from an ARM to a fixed rate loan. This will at least make your monthly payment more predictable, and no longer subject to changes in interest rates.
Reducing the term of your mortgage. It may be that you want to refinance from a 30 year term into, say a 15 year mortgage. That will enable you to pay off your loan faster, and build equity more quickly. You can do that with a HARP refinance.
Apart from the fact that you’re able to refinance your mortgage through HARP in ways that you cannot through a traditional mortgage, the loans come with several tangible benefits:
- There are no limits on your negative equity. Under the terms of the original program, you could borrow no more than 125% of the market value of your home. That has since been changed, and there’s no longer any limit. In theory at least, you can refinance your mortgage if it’s twice the value of your home,
- Appraisals are not required. Not only does this save you a closing cost fee, but it eliminates any concern about a problem with the value of your property.
- There is no underwriting for credit. In fact, a HARP refinance doesn’t even require a credit score. (The only credit requirement is the recent payment history on your mortgage, as listed above under eligibility requirements.)
- Because of the relaxed guidelines, very little paperwork will be needed on your part.
Are There Any Drawbacks to a HARP Refinance?
Despite the benefits provided by a HARP refinance, it does have a few limitations:
A HARP refinance doesn’t eliminate the negative equity situation. If you owe more on your home than it’s currently worth, that problem will not be reversed through a HARP refinance. You’ll be just as underwater after the refinance as you were before.
Loans will generally require mortgage insurance. Even if you didn’t have mortgage insurance on your original mortgage, it will be required on the HARP refinance, due to the negative equity situation.
No cash-out. If you’re looking to get a little bit of extra cash from the refinance to pay for a non-housing expense, you’ll be out of luck. HARP refinance loans are not designed for that purpose.
Proceeds can only payoff a first mortgage. A HARP refinance cannot be used to pay off a second mortgage or home equity line of credit (HELOC).
The program is set to end on December 31, 2018. This may not be the problem it seems at first glance. The program was originally set up as temporary, but gets a stay of execution every year.
Despite the drawbacks, a HARP refinance is almost certainly your best option if you are in a negative equity situation with a conventional mortgage. Speak with a mortgage loan officer and see if you qualify.