Why Use HARP Loans?
HARP loans plug a gap that opened during the housing crash of 2008. During the crisis, many homeowners, notably those who had just bought homes, found that falling housing prices had left them owing more on their mortgages than their homes were worth. Since conventional mortgage lenders usually require borrowers to have a loan-to-value ratio of less than 80 percent, homeowners who found themselves suddenly underwater with their mortgages were effectively unable to renegotiate their loans. HARP loans lift the loan-to-value cap by guaranteeing mortgages for eligible homeowners who owe more than their homes are worth.
Being able to refinance a mortgage has many advantages: Negotiating a lower interest rate can reduce the lifetime cost of a loan by thousands of dollars. Likewise, switching from interest-only payments to equity-first payments help dig borrowers out of debt and reduce their loan-to-value ratio more quickly than would have been possible under the old loan.
Renegotiating the terms of a troubled mortgage has value in itself. Many homeowners who opt for a HARP loan do so mainly to stabilize their monthly payments by trading an adjustable-rate mortgage for a fixed rate, which helps buffer the homeowner against wild swings in interest rates and housing prices over the life of the loan. Three loan companies within the market are Nymeo, American First Credit Union and 1st Mariner Bank.
HARP Loans: What to Look For
The federal government imposes certain conditions on those seeking to refinance with a HARP loan. Individual lenders may also require borrowers to meet their own standards before lending. The structure of the HARP home loan program allows a great deal of flexibility on the part of the lender, which makes it important for borrowers to know what to look for before closing. Also, the program is set to expire on December 31, 2015, which adds a certain urgency to the application process.
Fannie Mae- or Freddie Mac-Approved Lender
Federal requirements state that in order to be eligible for a HARP refinance, a mortgage must have been acquired or guaranteed by either Fannie Mae or Freddie Mac prior to May 31, 2009. Often, homeowners are unaware whether their loans are owned or underwritten by either agency, so it is important to check first.
Extra Requirements for Closing
Other requirements hold that your house must not be in foreclosure, you must be current on all payments and that you haven't made any late payments for at least 12 months. Individual lenders may impose additional requirements. Though the government does not require an appraisal or home inspection for a HARP loan, for example, some lenders might. To qualify for the federal program, borrowers must owe more than 80 percent of their home's value, though individual lenders may set their own caps.
Terms and Closing Costs
Closing costs for a HARP home loan are usually lower than they are for conventional refinancing. One consideration is whether the lender requires that the borrower buy or continue to pay for private mortgage insurance (PMI). This insurance protects lenders in the event of default, and most borrowers with low loan-to-value ratios are required by their lenders to carry PMI.
Taking out a HARP loan can save thousands of dollars on a mortgage that might otherwise not be worth saving. The program can reduce interest rates and monthly payments as well as restructure adjustable-rate loans to be more stable over the long term. Individual lenders may impose their own requirements, however, so exact terms vary considerably.