Using the HARP Program to Refinance an Underwater Mortgage

Just a few weeks ago, reader Sarah wrote in for advice on how to handle her underwater mortgage. Like many people who bought homes at the peak of the housing market in 2006 and 2007, she and her husband still owe significantly more than their home is worth.

Her note describes her thought process as she considers how to do damage control while getting out from under an underwater mortgage:

I recently got married and my husband and I both owned houses prior to that. We moved into mine and have been trying to sell his. Unfortunately, he bought his house in 2007, and since then the value has plummeted.

Currently, the loan is for $94,000 at a 6.25% interest rate and PMI still in effect. We pay about a $1,000 mortgage payment every month (insurance and taxes are escrowed) and about $90 of that actually goes to the principal. We can’t refinance because there is nowhere near 20% equity in the house right now.

The house was on the market for three months last fall and didn’t sell. And didn’t even have any offers or real interest. We’ve put it back on the market in this past week hoping that the spring and lowering of FHA loan requirements will possibly generate some more interest, but the first two showings were dismal.

The value of the house is somewhere between $85,000 and $95,000, so we are most likely underwater on it.

My question is: What option makes the most financial sense:

  1. Lower the sale price and pay out upwards of $20,000 on the mortgage to get rid of the house.
  2. Try and rent the house and recoup ~$800/month indefinitely.
  3. Pay off enough of the mortgage to get to 20% equity, then refinance to get rid of PMI and lower the interest rate, and then rent it out.

My gut tells me that option #1 is the best, but I’m having trouble proving that to my logical mind.

Option #4: HARP Refinance

Currently, Sarah is considering three different options: selling the house at a loss in order to put it behind her, becoming a landlord (an endeavor that often comes with its own set of consequences), or paying down the mortgage until she has 20% equity so she can refinance to a better rate and drop the PMI. All of those options sound doable.

However, there’s one big possibility that Sarah isn’t currently considering – a HARP refinance through the Home Affordable Refinance Program.

My guess is she hasn’t heard of it, or simply doesn’t think she would qualify. The thing is, the Home Affordable Refinance Program, also called HARP, was created for those who are in Sarah’s exact situation – people with an underwater mortgage.

Here’s some more information on how the HARP program works, what a HARP refinance entails, and what it takes to qualify.

What is the HARP Program?

Making Home Affordable is a government-sponsored program that launched in the wake of the financial crisis aimed to help people stay in their homes and avoid foreclosure. Part of MHA includes the HARP program, which is intended to help struggling homeowners get into a mortgage with better terms, lower payments, and a lower interest rate.

To qualify for a HARP refinance, you must meet the following requirements, according to the federal government:

  • The mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae.
  • The mortgage must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009.
  • The mortgage cannot have been refinanced under HARP previously, unless it is a Fannie Mae loan that was refinanced under HARP between March and May of 2009.
  • The current loan-to-value (LTV) ratio must be greater than 80% (in other words, you have less than 20% equity).
  • The borrower must be current on the mortgage at the time of the refinance, with a good payment history in the past 12 months.

In other words, you may qualify for a HARP refinance if you are up-to-date on your payments, have less than 20% equity in your home (as is the case with an underwater mortgage), and have a loan that is owned or guaranteed by Freddie Mac or Fannie Mae. To find out whether your loan is owned by either of those agencies, you can check directly with Freddie Mac or Fannie Mae. Also helpful to Sarah’s case is that the home does not have to be your primary residence.

While all of this sounds good in theory, the truth is, it doesn’t always make sense to do a HARP refinance – or any kind of refinance for that matter. Lowering your interest rate and monthly payment might sound nice, but there are always substantial closing costs associated with taking out a new mortgage loan.

If you do the math and find that you come out ahead even after paying your closing costs, then a HARP refinance is probably a good idea. Meanwhile, it might not make sense at all if the new loan doesn’t save you enough to make it worth it. Here’s what you need to do to decide:

Does a HARP Refinance Makes Sense for You?

  • Step 1: Determine whether you’re eligible for the HARP program. Do you have less than 20% equity in your home? Is your loan owned by Freddie Mac or Fannie Mae?
  • Step 2: Figure out how much you owe on your current loan at its current interest rate. How much interest have you paid already? How much do you have left to pay?
  • Step 3: Use a mortgage calculator to estimate your new home payment using today’s low mortgage rates. Figure out how much you would save each month by refinancing, after factoring in average closing costs for you area.
  • Step 4: Calculate the difference between the remaining amount of money you owe on your current loan and what you would pay over the life of your new loan. Make sure to factor your closing costs into the equation.
  • Step 5: If you’ll save enough money by doing a HARP refinance to make it worth your while, then go for it.

Does a HARP refinance make sense in Sarah’s situation? It’s hard to say. There are a few pieces missing from the puzzle that could really make or break the profitability of a refinance, and it’s hard to guess without knowing that information.

If she did qualify and a new loan shaved off enough money from her monthly mortgage payment, that could make the difference between renting out the home at a loss and breaking even or even making a small profit each month.

The HARP program is something anyone in Sarah’s situation should at least consider. If the math adds up in her favor, she could easily save thousands of dollars – and get out from an underwater mortgage – all in one fell swoop.

Have you ever heard of the HARP program or a HARP refinance before? Have you done one yourself?

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