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How Will Falling Rates Impact the New HARP Program?

Written By:
October 29, 2011 at 11:37 AM

If the time is ripe for refinancing, now seems to be ideal. Rates descended this week on the heels of HARP revision news.

The 30-year mortgage product dropped five basis points this week to 4.33%; 15-year mortgages dipped to 3.57%. The 5/1 adjustable rate mortgage dropped two basis points to 3.22%. The rate reduction correlates with the debt crisis in Europe as leaders meet to contemplate a second bailout.

Borrowers who may have been waiting to see what would happen are starting to take action. Academy Mortgage planner Derek Egeberg says, “My phone has been ringing off the hook with the people wanting to refinance" through HARP. He says that the old HARP rules allowed borrowers to refinance up to 125% of their home’s loan to value. The new HARP revision will remove that limit to open refinance opportunities for those who are considered to be “underwater.”

This means that in the past, if you owed $200,000 on your home and carried an interest rate of 6.5%, but your home was only worth $160,000 you would be turned down for HAPR. However, under the new plan the borrower in the same scenario could pursue refinancing.

The enthusiasm and activity Egeberg expressed can be seen in the overall mortgage application increase. The Mortgage Bankers Association weekly survey reports that mortgage applications increased 4.9% last week compared to the previous week. Refinance applications rose 4.4% and purchase applications grew 6.4%.

How Much Money Could The Average Borrower Save?

Under the new HARP guidelines, the average borrower could save approximately $2,500 a year.

The Federal Housing Finance Agency (FHFA) illustrates how the update could impact a borrower with a $200,000 mortgage loan at a rate of 6.5%. The monthly payment would be $1,264--on a home worth $160,000 the homeowner would have a current loan-to-value (LTV) ratio of 125%.

Compare and contrast what would happen if the borrower refinanced to a 30-year mortgage loan compared to a 20-year loan.

If the borrower refinanced to a 30-year fixed rate mortgage at 4.5%, the monthly payment would be reduced to $1,013. However, with the 30-year mortgage the borrower’s loan balance would not hit the $160,000 mark for at least 10 years.

Looking at the 20-year fixed rate mortgage at 4.25%, the monthly payment would be $1,238. Although the borrower only saves $26 per month, the loan balance would reach $160,000 in only five and a half years.

Another example is the borrower who takes out a 30-year $125,000 mortgage loan at 6.5% in 2007. Principal and interest would total $790 per month with the total loan costing an extra $159,400 by the time the home is paid off in 2037.

If the borrower made consistent loan payments for four years, the balance should be whittled down to approximately $116,000 by this time. Using the a 15 year-mortgage as an example, a refinance at 3.5% would re-set the monthly mortgage payment to $829 per month and $33,270 in total interest with the home being paid off in 2026.

Both examples do not take into account taxes, refinance costs and insurance, but illustrates how the borrower could not only reduce the number of years it takes to pay off the loan but also slashes overall costs.

In a statement, Bob Nielsen, chairman of the National Association of Home Builders (NAHB) said, "Making more borrowers eligible for refinancing their mortgages by enhancing the Home Affordable Refinance Program (HARP) will give a badly needed boost to consumer confidence. Enabling additional home owners to take advantage of today's low mortgage interest rates in cases where their loans are greater than the value of their homes will give some households more money to spend on other things and enable others to at least pay their mortgages off at a faster rate."

The New Program Will Expand Borrower Eligibility

FHFA Acting Director, Edward J. DeMarco says that the new program should provide accessibility to a wider number of borrowers. An estimated 11 million Americans are considered to be “underwater” with their mortgages.

"We know that there are many homeowners who are eligible to refinance under HARP and?those are the borrowers we want to reach,” he says.

“Building on the industry's experience with HARP over the last two years, we have identified?several changes that will make the program accessible to more borrowers with mortgages?owned or guaranteed by the Enterprises,” DeMarco continues. “Our goal in pursuing these changes is to create?refinancing opportunities for these borrowers, while reducing risk for Fannie Mae and Freddie?Mac and bringing a measure of stability to housing markets."

Who is Eligible Under the New Program?

Borrowers who have stopped making mortgage payments are excluded from being eligible for the new HARP program. Additionally, if the borrower has already refinanced once under HARP, they may not participate in the new program.

However, those who are current on their mortgage payments, with no late payments made within the past six months and have a loan owned by Freddie Mac or Fannie Mae are eligible for HARP. According to Princeton University housing expert Jacob Rugh, approximately half of the mortgages are owned by either Fannie or Freddie.

Kevin Stein, associate director of the California Reinvestment Coalition is optimistic about the updated program. “People who will qualify for it will be likely to get it,” he said.

Additional benefits of the new program include eased underwriting guidelines. In the past a small blemish on your credit report would disqualify many borrowers, however the new program will place less emphasis on small problems.

For borrowers who do not qualify for HARP, Rugh suggests that those homeowners should seek assistance through housing counseling agencies.





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