Underwater homeowners and refinancing

Plummeting home values and low down payment mortgage loans have resulted in "negative equity" situations for many Americans. Most homeowners who do not need to sell their home immediately can gradually build equity by paying down their mortgage balance and waiting for home values to improve.

Homeowners who are interested in refinancing, though, face greater difficulty in obtaining a loan approval when they lack equity. Most lenders will qualify borrowers for a home refinance at a maximum of 95 percent loan to value.

Regardless of the loan-to-value ratio, there are a number of reasons homeowners are looking for refinancing information.

Reasons to consider refinancing your home

  • To switch from an adjustable rate mortgage (ARM) or interest-only mortgage into a fixed-rate loan
  • To lower monthly payments by borrowing money at a lower interest rate 
  • To accelerate paying off the mortgage in full with a shorter loan term 
  • To take cash out of the home equity by refinancing 

For homeowners who want to refinance, the government's Making Home Affordable Program includes a component called the Home Affordable Refinance Program (HARP). Homeowners who qualify for HARP may be able to achieve some of their goals for refinancing, except for the ability to take cash out since participation in the program is limited to borrowers with little or no equity.

The goal of HARP is to help homeowners who are up-to-date on their mortgage payments but have been unable to refinance due to low equity. The intention is to help these homeowners lower their monthly principal and interest payments by qualifying them for a new mortgage with a reduced interest rate. Another objective is to reduce the risk of these homeowners defaulting on their ARM or interest-only mortgage loans when their rates reset.

Determining eligibility for HARP refinancing

If you can answer "yes" to these three questions, you are eligible for a HARP refinance:

  1. Are you the owner of a one-to-four unit home?
  2. Do you have a home loan owned or guaranteed by Fannie Mae or Freddie Mac?
  3. Are you current on your mortgage payments?

You can check on the ownership of your home loan through the HARP website.

HARP requirements for home refinancing

  • The loan-to-value ratio for the new home loan must be 125 percent or less, based on the current market value of the property
  • You must be creditworthy and have a reasonable ability to make the new mortgage payments
  • You cannot be delinquent on your mortgage loan payments

Monthly principal and interest payments will not necessarily be lowered through a HARP home refinance. The payments could even go up if you have an interest-only home loan or an ARM at a low rate. The benefit of refinancing would be to lock in a sustainable payment and potentially lower the cost of interest over the length of the loan.

What to do next

Once you've determined initial eligibility for the HARP program by answering the above three questions, you will need to gather the following financial materials and call the mortgage servicer listed on your monthly mortgage statement to request a HARP refinance.

  • Monthly mortgage statement
  • Pay stubs or other income documentation to prove your monthly gross income
  • Most recent federal income tax return
  • Information about any second mortgages or home equity lines of credit on the home
  • Account balances and minimum monthly payments due on all credit cards
  • Account balances and minimum monthly payments due on all other debts such as student loans, car loans or personal loans

Refinancing your home through HARP will not reduce your principal balance, but it could save you money on the monthly payments and allow you to keep your home without a dramatic increase in monthly payments that you could experience with an interest-only home loan or an ARM.

HARP expires on June 10, 2011. All borrowers must have closed on their new home loan by that date. If you are considering applying for a HARP refinance, gather your paperwork and call your lender. But first, you may want to contact other lenders to see if you can qualify for a home refinance with one of them.