HARP closing costs will not be much different than those for other mortgage loans, since some borrowers may pay points and have expensive closing costs, while others may be able to refinance with minimal expense. Moreover, some borrowers may even have the option of a zero closing cost HARP refinance. To determine your options, contact and compare lenders to find the optimal choice for your circumstances.
As previously indicated, some borrowers may be able to secure a HARP refinance with no closing costs. However, borrowers should always evaluate these offers to determine whether or not they are beneficial. Like other no-closing-cost loans, the zero-cost HARP refinance includes a higher HARP interest rate to compensate for the fees that have been removed; likewise, borrowers can alternatively pay more up-front fees to secure an advantageous interest rate. When choosing between loan options, always attempt to find the right balance between closing costs and interest rate, depending on how long you intend to live in the home.
Essentially, a lower interest rate will benefit long-term homeowners more, as the up-front closing costs will be paid for by the reduced interest payments over the loan’s lifetime, as well as paying off the loan balance faster. In contrast, borrowers who may move in a relatively short time-frame may not benefit from a HARP refinance, particularly if the cost of the refinance exceeds the savings prior to moving.
When performing a refinance, regardless of the program, borrowers considering a HARP 2.0 refinance should weigh the HARP closing costs against the potential benefits. These pros and cons may differ from borrower to borrower, and the advantages of HARP may apply to some borrowers but not others.
For instance, according to Freddie Mac statistics, borrowers who refinance through HARP during the first half of 2010 saved approximately $125-$150 on monthly mortgage payments. While this may seem a favorable transaction, these refinances often cost thousands of dollars, taking years to break even on the refinance costs alone.
In general, borrowers with larger mortgages will benefit more from HARP refinances than borrowers with less expensive homes. For example, a borrower that uses the HARP program to refinance a $125,000 mortgage from a 6.5% interest rate will save roughly $90 each month in mortgage payments with a reduced mortgage rate of 5.375%; however, the cost of such a refinance would total $3,230, making this option much less attractive and taking nearly three years to break even.
In contrast, a borrower with a $375,000 mortgage refinancing under the same circumstances would stand to save $270 monthly. While closing costs in this scenario would still be exorbitant, estimated to be $3,900, the borrower would break even from the refinance in just over a year. As such, HARP refinances are much more beneficial for borrowers with larger loans.
In other cases, borrowers may be more inclined to secure a HARP refinance if the lender would be willing to reduce the HARP closing costs.
In many states, reducing or entirely eliminating closing costs will not be an option. Although some lenders may be willing to lessen these up-front fees, most will typically compensate this discount by charging a higher interest rate.
Additionally, borrowers may roll up the HARP closing costs into the balance of the refinance loan; however, this will notably increase the overall loan cost by increasing interest payments over the course of the loan lifetime. Furthermore, regardless of the official guidelines, HARP lenders will issue refinance loans at their own discretion and may choose not to grant a refinance for borrowers above their specific loan-to-value expectations.
Moreover, in some cases, borrowers can obtain a HARP appraisal waiver that allows them to forego ordering an appraisal when conducting the refinance. As a result, borrowers can save on any appraisal fees that would otherwise be charged at closing.
As with other mortgage loans, borrower loan-to-value ratios (LTV) and credit scores will affect their potential interest rate offers. Fundamentally, HARP refinance loans must conform to Fannie Mae and Freddie Mac criteria, which include higher rates for borrowers with lower credit scores, higher HARP LTV, or lower down payments.
Fannie Mae guidelines stipulate that borrowers with credit scores below 620 and minimal home equity must pay three more basis points (3%) than a borrower with a 720 FICO score and the same amount of equity. Likewise, a borrower with a credit score of 620 would be offered an interest rate 0.5% higher than the borrower with a 720 credit score.
These points can alternatively be paid by the borrower as up-front fees as a means to acquire a lower interest rate. Rather than offering a higher interest rate, which could discourage the buyer from refinancing altogether, the lender may offer the option of buying points for a lower HARP interest rate, although this could cost an additional several hundred to a few thousand dollars at the loan’s closing.
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