While not all homeowners have access to refinance loans through the Home Affordable Refinance Program (HARP), eligible borrowers can benefit tremendously, especially those with underwater mortgages and high interest rates. This article will briefly explore the main advantages of the HARP 2.0 program, as well as covering what borrowers will benefit most from a HARP refinance.
In general, one of the best HARP advantages is that these refinances provide borrowers with access to lower HARP interest rates and consequently lower monthly mortgage payments. Consider the following example:
Imagine a borrower obtained a 30-year conventional mortgage in 2008 with a loan balance of $211,000 and an interest rate of 6.5%. Under these terms, monthly mortgage payments would average at $1,334, considering only principal and interest payments. After four years of making mortgage payments, the borrower would still owe roughly $200,000 on the mortgage; however, the value of the property declines drastically as a result of the housing market collapse, decreasing to only $160,000. As a result, the borrower’s loan-to-value ratio (LTV) would amount to 125%, thereby disqualifying the borrower from receiving any loan refinance and making it impossible to capitalize on falling mortgage rates.
However, due to the lack of HARP LTV requirements, the borrower can access to a refinance loan, allowing him or her to acquire a significantly lower mortgage rate and thereby decrease monthly mortgage payments considerably:
In some cases, borrowers may choose to refinance with the aim of paying off the home faster in order to save even more over the course of the loan’s term. These borrowers still may reduce their mortgage payments through the HARP refinance, although they will still pay more each month than those with longer loan terms.
For instance, imagine that the borrower of scenario described above decided to pay off his or her mortgage faster and therefore build equity quicker. Rather than refinancing into another 30-year fixed-rate mortgage, the borrower can switch to a 20-year fixed-rate mortgage (FRM) with the same reduced rate of 4.25%.
For those who can afford slightly higher mortgage payments, the benefits of HARP can be even more substantial, as homeowners can access even lower rates and build equity faster with a 15-year fixed-rate mortgage. For instance, with the decreased mortgage terms, the borrower could reduce his or her mortgage rates from 6.5% to 3.75%, lower than those of a 20 or 30-year FRM. With such a low rate, borrowers can save even more over the lifetime of the loan, while accumulating equity much faster and paying off the loan much sooner.
Aside from these examples, HARP advantages also include:
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