Archive for October, 2011
Understanding the New HARP Refinance
So what do the new changes to the government’s Home Affordable Refinance Program (HARP) mean for you? If you’re an underwater homeowner, it could mean a lot.
In fact, it could be the thing that finally allows you to refinance your mortgage at some of those all-time low interest rates you’ve been hearing about, but couldn’t qualify for. Here’s a look at some of the key elements of the changes to the government-backed mortgage refinance program, announced Monday by the Federal Home Finance Agency (FHFA).
No loan-to-value restriction
The main thing is that you no longer have to worry about how far your home has fallen in value since you took out your mortgage. Previously, you couldn’t get a HARP refinance if your mortgage balance exceeded your home value by more than 25 percent. That limit has been totally eliminated, meaning you can still refinance even if your home value is a third of what you owe on your mortgage, or even less.
Appraisals, fees waived
The new rules waive certain fees charged at closing, particularly for borrowers who choose to refinance into 15- or 20-year fixed-rate mortgages. High closing costs have been seen as a barrier to refinancing under HARP, so the administration hopes that waiving these fees will enable more homeowners to refinance. Since home value is no longer an issue, appraisals are no longer required, as long a reliable automated estimate is available, though some lenders may still insist on one.
There will still be some fees associated with closing costs on the new loan, which can be financed as part of the new mortgage.
Fannie Mae, Freddie Mac mortgages only
The HARP underwater refinance is available only to borrowers who have mortgages backed by Fannie Mae or Freddie Mac. Since they’re already on the hook if the loans go bad, it’s in their interest to enable underwater borrowers to refinance so they’re less likely to default. It doesn’t really matter to them if the interest rate is reduced, since the interest is paid to the investors who buy the guaranteed loans from Fannie Mae or Freddie Mac. You can find out if yours is a Fannie Mae or Freddie Mac loan at the agencies’ web sites.
To qualify for the new HARP refinance, you need to have been current on your mortgage payments for the last six months and been late no more than once in the past year. The mortgage must have been transferred to Fannie Mae or Freddie Mac no later than May 31, 2009. The mortgage must be on a one-to four unit dwelling that serves as your primary residence.
How much can I save?
Underwater borrowers refinancing through the program will save an average of $2,500 a year on their mortgage payments, or more than $200 a month, according to Shaun Donovan, Secretary of the Department of Housing and Urban Development. The government estimates the changes to the program will benefit up to 1 million people, although Moody’s Analytics puts the figure at 1.6 million. The Obama administration may be a bit cautious after their original estimates for borrowers helped by the current version of HARP and its companion HAMP loan modification program turned out to be too optimistic.
What kind of loans can I get?
This is a significant change from the current HARP. The administration is encouraging underwater borrowers to refinance into short-term 15- and 20-year fixed-rate mortgages by waiving most or all program fees for those loans. The current program mandates that borrowers refinance into 30-year fixed-rate mortgages only. Homeowners will still be able to refinance into 30-year loans if they wish, but they’ll have to pay more fees if they do. Combined with the ultra-low rates now available on 15-year mortgages, that’s a significant prod for borrowers who’ve been in their homes a number of years to shorten up their term and start building back more quickly toward positive equity.
When is it available?
Fannie Mae and Freddie Mac are scheduled to provide full details of the program, including information to lenders, by Nov. 15. The FHFA says some lenders may be able to start offering the program by Dec. 1, although most estimates are of a rollout in the first quarter of 2012 for most participating lenders. Chase Bank and mortgage lender Genworth have already indicated they look forward to participating.
Sounds great! What are the downsides?
Like the current HARP, the new version is voluntary, so not all lenders may participate. But if you have a Fannie Mae or Freddie Mac mortgage, you can refinance with a participating lender even if your current one is not in the program.
Because the program is voluntary, lenders may have their own requirements they overlay on top of the HARP guidelines, though there will likely be limits on what they can do. However, there will still likely be credit score and income requirements, the same as for any mortgage.
It’s also not yet clear how the new guidelines will address loan-level price adjustments, which are tacked onto the interest rate to reflect certain risk factors. Since being underwater in itself is considered a major risk factor, interest rates offered to homeowners under the current program have sometimes been considerably higher than they expected, even above what they are currently paying. But if seriously underwater borrowers are able to get near-market interest rates when refinancing, this could be a real bonanza for financially stable underwater homeowners.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.
For those who can qualify, it’s an extraordinary opportunity to buy or refinance. And mortgage rates could fall even further now that the Federal Reserve plans to reshuffle its portfolio of securities to try and lower long-term rates.
On Thursday, Freddie Mac said the average rate on a 30-year fixed mortgage dropped from 4.01 percent last week, the previous low. The average rate on a 15-year fixed loan, a popular refinancing option, dipped to 3.26 percent, also a record.
Still, rates have been below 5 percent for all but two weeks in the past year and have done little to boost home sales. This year is shaping up to be among the worst for sales of previously occupied homes in 14 years.
Many people are reluctant to take the risk in this market. High unemployment, scant pay raises and heavy debt loads are deterring many would-be buyers.
Others can’t qualify for the historically low rates. Banks are insisting on higher credit scores. And many want first-time buyers to put down 20 percent. Few people have that much cash or home equity to satisfy the requirement.
Mortgage rates have tumbled because they tend to track the yield on the 10-year Treasury note. The yield has fallen in recent weeks, largely because investors are worried about the U.S. economy and the debt crisis in Europe. So they have shifted their money out of stocks and into the safety of Treasurys.
A drop in mortgage rates could provide some help to the economy if more people could refinance. When people refinance at lower rates, they pay less interest on their loans and have more money to spend.
Consider a homeowner who owes $250,000 and is paying 5.09 percent on a 30-year fixed mortgage. That was the average rate being offered in January 2010. Refinancing the loan at 3.94 percent could save him or her more than $2,000 a year.
But many homeowners with good jobs and stable finances have already refinanced over the past year. Most economists say rates would need to fall at least a full percentage point before it makes sense to refinance again.
The reason is homeowners typically pay a few thousand dollars in closing costs when they refinance. And the low rates being offered don’t include extra fees, known as points, which many borrowers must pay to get the lowest rates. One point equals 1 percent of the loan amount.
The average fee for the 30-year and 15-year rose to 0.8. The average fees for both the five-year and one-year adjustable-rate loans were 0.6 and 0.5, respectively.
To calculate average mortgage rates, Freddie Mac surveys lenders across the country Monday through Wednesday of each week.
The average rate on a five-year adjustable-rate mortgage fell to 2.96 percent. The average for the one-year adjustable-rate mortgage ticked up to 2.95 percent.
The Associated Press contributed to this report.