Home values have been on the mend since the financial meltdown of just a decade ago. This has been good news for people who have struggled with negative equity in their homes, meaning the value is lower than the amount they owe on their mortgage.
The percentage of “underwater” homes has dropped significantly, decreasing 16% year over year at the end of 2018 to comprise 4.1% of all mortgaged properties, real estate research firm CoreLogic found. But that means there are still homeowners who need assistance with recovering their equity. A popular government-sponsored refinancing program aimed at helping these homeowners has recently ended, and people looking for help getting above water may not be aware of the other options they have.
In this article, we highlight and explain what the closing of HARP means for homeowners and several available alternatives.
What is HARP?
The Home Affordable Refinance Program, known as HARP for short, is an initiative that helped underwater homeowners refinance their mortgage. The program was introduced in 2009 after the housing crisis.
HARP allowed eligible homeowners to refinance their mortgages to lower their mortgage interest rate or switch from an adjustable-rate to a fixed-rate mortgage even if they were underwater. Typically, lenders will not allow a borrower to refinance if the house is worth less than what is owed.
In order to qualify, homeowners needed to meet the following requirements:
- No late mortgage payments over the last six months that were 30-plus days behind, and no more than one late payment over the last year.
- The mortgage you’re attempting to refinance must be for your primary residence, a one-unit second home or a one- to four-unit investment property.
- Your mortgage must be owned by Fannie Mae or Freddie Mac.
- Your mortgage was originated on or before May 31, 2009.
- Your loan-to-value ratio is more than 80%.
The program had been extended a few times, but the last HARP deadline was Dec. 31, 2018.
Fannie and Freddie’s HARP replacements
Government-sponsored enterprises Fannie Mae and Freddie Mac have refinance products in place that are meant to replace HARP.
Fannie Mae’s High Loan-to-Value Refinance Option
Beginning on Nov. 1, 2018, Fannie Mae has offered a high loan-to-value refinance option to borrowers with mortgages owned by the government-sponsored entity. The product is meant to make refinancing possible for borrowers who are maintaining on-time mortgage payments but have an LTV ratio that exceeds the amount allowed for standard refinance options.
Borrowers must benefit from the refinance through a reduction in their monthly principal and interest payment, a lower mortgage interest rate, shorter loan term or by switching to a fixed-rate mortgage. There is no maximum LTV ratio for fixed-rate mortgages; however, the maximum LTV for adjustable-rate mortgages is 105%.
The eligibility requirements include:
- The loan being refinanced must be an existing Fannie Mae-owned mortgage.
- The loan must have been originated on or after Oct. 1, 2017.
- At least 15 months must pass between the loan origination of the existing mortgage and the refinanced mortgage.
- Borrowers must be current on their mortgage, have no late payments over the last six months and only one 30-day delinquency over the last 12 months. Delinquencies longer than 30 days aren’t permitted.
- The existing mortgage can’t be a Fannie Mae DU Refi Plus or Fannie Mae Refi Plus mortgage.
Freddie Mac’s Enhanced Relief Refinance Mortgage
Freddie Mac offers the Enhanced Relief Refinance mortgage to borrowers who are current on their mortgage but can’t qualify for a standard refinance because of a high LTV ratio. The mortgage being refinanced must meet the following requirements:
- The mortgage must be owned or securitized by Freddie Mac.
- The mortgage can’t have any 30-day delinquencies over the past six months and only one 30-day delinquency in the last year.
- The closing date for the mortgage was on or after Oct. 1, 2017.
- The mortgage can’t already be a Relief Refinance mortgage.
- There should be at least 15 months between when the original loan was closed and the refinanced loan’s origination.
- The loan can’t be subject to an outstanding repurchase request.
- The maximum loan-to-value ratio for adjustable-rate mortgages is 105% and there’s no max for fixed-rate mortgages.
Borrower benefits include a lower interest rate, switching from an adjustable-rate to fixed-rate mortgage, shorter mortgage term or lower monthly principal and interest payment.
Alternatives to refinancing when you’re underwater
If refinancing your mortgage doesn’t sound like the best move for you, consider one of the following alternatives.
A mortgage modification is a way to change the original terms of your loan without going through the refinancing process. In some cases, you can work with your lender to switch from an adjustable-rate to a fixed-rate mortgage, extend your loan term, lower your interest rate or add past-due amounts to your unpaid principal balance.
Modifying a mortgage could be beneficial for homeowners facing hardship who aren’t eligible to refinance and are delinquent on their mortgage payments or expect they will eventually fall behind.
If you have a lump sum of at least $5,000 in cash, you could potentially recast your mortgage. A mortgage recasting results in lower monthly mortgage payments. You pay a lump sum of cash to your lender to reduce your outstanding loan principal amount, then your loan is reamortized based on the lower remaining principal balance. Your interest rate and loan term stay the same.
This option makes sense if you’re expecting a bonus from your employer, a large income tax refund or some other financial windfall.
The bottom line
Although HARP has come to an end, there are still options for mortgage borrowers with Fannie- or Freddie-owned loans. In order to qualify for the enterprises’ refinancing programs, it’s helpful to maintain on-time payments even when your loan amount exceeds your home’s value.
If you don’t qualify, be sure to strategize on how best to attack your mortgage balance and rebuild equity. Consider making extra mortgage payments whenever possible by freeing up room in your budget, earning extra income or dedicating unexpected money to your mission.