"Underwater" Refinance

Owe more on your mortgage than your home is worth? “Underwater” borrowers have an opportunity to refinance their mortgage, but you need to act soon before the program expires.

The government’s Home Affordable Refinance Program (HARP) expires on June 10, 2010. Part of the government’s Making Home Affordable foreclosure prevention initiative, it allows qualified homeowners to refinance their mortgages at up to 125 percent of their homes’ current value.

The program is designed to assist homeowners whose homes have lost value over the past few years and would like to refinance into a more affordable loan. And while June 10 may seem like a long way off, potential delays due to red tape, negotiations with second lien holders and growing demand as the deadline approaches mean that interested homeowners should act quickly.

The program is a potential lifeline for “underwater” homeowners who have an adjustable rate mortgage (ARM) that is scheduled to reset to a higher interest rate or other type of mortgage where the payments will eventually increase. The usual strategy for such borrowers is to refinance before the interest rate or monthly payments increase, but with the sharp drop in home values over the past three years, many will not be able to qualify for a private-lender refinance – which is where the 125 percent Home Affordable Refinance comes in.

To benefit from a Home Affordable Refinance, you don’t have to be facing an imminent increase in your interest rates or monthly payment. Most ARMs, if not refinanced, are designed to gradually reset to an interest rate that’s much higher than market rates. Interest-only and payment-option loans eventually require that the borrower begin repaying principal. All can result in an increase of hundreds dollars in one’s monthly mortgage payment if the mortgage is not refinanced – and for underwater homeowners, the HARP may be their only realistic chance of doing so, baring a miraculous recovery in housing prices over the next few years.

HARP can also be a boon to homeowners with a higher-interest fixed rate loan who want to take advantage of current interest rates as well. To qualify, you need to have a mortgage that is backed by either Fannie Mae or Freddie Mac, the government-supported lenders who are playing key roles in the program, and be current on your mortgage payments.

Second lien can exceed 125 percent

A few important things to clarify. You cannot owe more than 125 percent of your current home value on your first, or primary mortgage. Note that you can still qualify even if your total mortgage debt including a second mortgage, home equity loan or line or credit exceeds 125 percent. However, the holder of your second mortgage or home equity loans must agree to remain in a junior position to the refinanced loan for you to qualify. The time required for such negotiations is a major reason borrowers in such a position should act quickly.

Also, contrary to popular belief, you do not necessarily have to be in financial difficulty to qualify for a HARP refinance. Some participating lenders will not consider homeowners for this program unless they are experiencing financial problems, but others may be more flexible. You do NOT have to refinance with your current lender – you can use any Fannie Mae or Freddie Mac –approved lender participating in the program.

The HARP refinance is the lesser-known counterpart to the Making Home Affordable loan modification program, which has received most of the attention since the program’s inception, and far more applicants. If you can’t obtain a HARP refinance, you may still be able to get a Home Affordable Modification, which may be easier to qualify for, although not offering the same benefits as a refinance. That part of the program is scheduled to continue through Dec. 31, 2012.