As many now know, the Making Homes Affordable Program aka Harp 2 Refinance allows people to refinance if their loans are owned by Fannie Mae or Freddie Mac, with out any loan-to-value restriction. Successfully refinancing any occupancy home despite being underwater is quite common these days under this program.
While this program, is helping many homeowners take advantage of today’s historic low interest rates, the other side of the pendulum has homeowners who have first and/or second mortgages, whose loans are not owned by Fannie Mae or Freddie Mac and subsequently are upside down and cannot refinance.
Directions to determine eligibility to refinance
1. Look up your mortgage on Fannie Mae’s Loan Lookup Tool or Freddie Mac’s Loan Lookup Tool if either entity owns your loan, and your loan was taken out June 1, 2009 or before, you are likely eligible
2. Check out Zillow’s Home Valuation and get a rough idea for the homes that have sold around your property
3. Contact a local real estate agent and inquire about the possibility of your home’s value, many will give you an honest answer in hopes to secure listing down the road, if a fit, consider them as a resource for later on.
4. Contact a mortgage lender to get qualified for a loan. This means allowing them to review your credit, debt, income, and assets.
5. Allow mortgage lender to order an appraisal to determine the loan to value (*On the positive side, home prices are up in most markets, so ordering an appraisal provides a good chance of being able to successfully procure a refinance)
*Important Mortgage Tip: Prior to ordering appraisal, make sure you can qualify for a loan above and beyond anything else. Typical cost for an appraisal is $450.
How the numbers pencil to refinance without Harp 2
Lending Requirements to be mindful of first:
- If less than 20% equity, monthly mortgage insurance will be required including an impound/escrow account for monthly property taxes and fire insurance
- Ability to refinance will be limited to 97% loan to value financing on conforming loans where $417,000 is the benchmark conforming loan limit (most states) or 85% loan to value on conforming high balance loan limit. Ex. Sonoma County, California Conforming Loan Limit is $417,000, and Conforming High Balance Loan Limit is $520,950.
- If loan amount is on the larger side (bigger than $417,000), an FHA Loan will go to 97% loan to value (FHA also ensures bigger loan amounts beyond the Conforming High Balance Limits (again varrying from county to county in each state) Sonoma County, CA the FHA will ensure up to $662,500 at 97% loan to value.
*To refinance the loan to value will have to be adjusted to fit within the guidelines for the loan program/product being sought
Appraised Value $300,000
Current loan amount to be refinanced $315,000
Interest rate on current loan 4.625%
Closing costs on new loan $2700
Final pay off on current loan $317,200
New rate 3.5% on new 30 year fixed rate loan
Monthly savings potential $425 per month
Max new loan amount at max 97% loan to value $291,000
Cash needed to close $28,900
In such a scenario, most borrowers will look at the cash needed to close escrow and would opt to not do the transaction. However, there’s another more beneficial way to look at this. A better question for any homeowner considering refinancing in this type of situation, “what kind of return am I receiving on my $28,900 in the bank?”
In most cases you’d be lucky to get .90% APY, right?
Consider this, if it takes giving up $28,900 in order to gain a savings $425 per month, that is a 17.6% cash on cash return on your money.
Here’s how: ($425 savings ×12 months) ÷ into $28,900 of capital required for the investment= 17.6% return
General Rules For Paying Down Your Principal Balance
- If annual return is greater than the rate you are earning on those dollars, refinancing makes sense
- Can you breakeven within 12 to 24 months? Breaking even determined by: dividing costs by refinance monthly savings
- If the cash already invested elsewhere is lower than the cash on cash return you’ll gain by refinancing, refinancing makes sense