HARP gives responsible homeowners who would otherwise not qualify because their loan-to-value ratio is too high the ability to refinance anyway to take advantage of lower interest rates. The homeowner must be current on their mortgages, must not have missed any payments in the last six months or more than one in the last year, must have an income, and must receive a tangible benefit from the refinance.
Also, to qualify for a HARP refinance the loan must be owned by either Fannie Mae or Freddie Mac.* The theory behind HARP is that if a homeowner is reliably making payments on an existing loan for which taxpayers are already on the hook in the event of a default, lowering their interest rate and payments into a new loan does not make the taxpayer’s risk greater – in fact it improves the agencies’ position.
What happens after September 2017? I’m so glad you asked.
Think of it as HARP II. The new program – which does not yet have a snappy name as far as I can tell – will carry all the same guidelines as HARP, but there are no eligibility cut-off dates as with HARP and borrowers can use the program more than once.
It was not known before last Thursday whether the HARP program would be continued or not after the end of 2016. But Mel Watt, Director of the Federal Housing Finance Agency (FHFA) said that the FHFA believed there were still 300,000 households that could benefit from the program in announcing the extension and the new program.
What does HARP do for homeowners?
Some advantages of HARP (and the new program) include no minimum credit score, no maximum debt-to-income ratio, and no maximum loan-to-value ratio.
Fannie Mae and Freddie Mac (the agencies) do not make loans directly to consumers, however. Instead, lenders make the loans, package them and then sell them to the agencies. It is likely – almost certain – that each lender will add their own guideline restrictions to the program, so when a consumer applies for a HARP loan the unrestricted credit score, debt-to-income ratio and loan-to-value ratios might indeed have limitations. But the qualification for the program will still be substantially better than conventional lending today.
How much can homeowner’s save?
Let’s say you have a $200,000 mortgage balance with 22 years left to run and an interest rate of 5.5%. Your monthly payment would be $1,307.70. If you refinanced into a new 30-year fixed at 4.000% (for the purposed of the example only; this is not a quote for your personal circumstances) your new minimum payment would be $954.83, or $353 per month lower.
Note that you are extending your loan out another 8 years, and your projected lifetime payments would go from $345,232 for your current loan to $343,739 for your proposed loan. Even with the additional 8 years you would still save a little money, and of course you could always accelerate your payments when your financial picture improves to pay the loan off faster and save even more in lifetime interest costs.
If for whatever reason you haven’t yet taken advantage of this great program, don’t despair – you’ve just been given at least another 16 months.
* The vast majority of home loans are owned by one of the agencies, even if your lender is one of the big banks. To find out if your loan is owned by Fannie Mae or Freddie Mac, visit their web sites:
Some information for this story was sourced from the Mortgage Bankers Association.