Obamas renewal of the HARP refinance program hopes to attract 2 million Americans to take advantage of sub-5% rates. Does lowering your rate meet the only threshold for refinance feasibility? If you can only reduce your interest rate by 0.5% or even less, does that mean that you should not refinance? A skilled loan officer should answer this question for you by discussing all of the reasons to refinance, including whether shortening your term.
When you discuss refinancing with your loan officer, make sure you consider the other reasons it might make sense to refinance your current mortgage. The most overlooked reason to refinance involves the reduction of the loan term. Surprisingly, you can save far more money shortening the term of your loan than by reducing your interest rate, sometimes even substantially. For instance:
Term Reduction Analysis
Traditional Proposal
Loan Balance $ 100,000.00
Initial Term 360
Interest Rate 6.500%
Remaining Months 324
Existing Payment $ 632.07
Proposed 25 Year
Loan Balance $100,000.00
Closing Costs $2,000.00
New Loan $102,000.00
New Initial Term 300
New Rate 6.000%
New Payment $ 657.19
Monthly Savings $ (25.12)
Payments Remaining on existing Financing $ 204,790.04
Payments with new Financing $ 197,156.23
Life of Loan Savings $ 7,633.81
In this case a borrower saved over $7,500 just by reducing the loan term by an additional 2 years.
This comparison is for an affordable home at $100,000. If you were refinancing a Bethesda mortgage, Chevy Chase mortgage, a Rockville mortgage or Potomac mortgage, where we are, the average loan amounts are $700,000. Refinancing a $700,000 sample mortgage in Montgomery County, MD for term reduction would result in savings of over $52,500!
Another Important Consideration
A common mistake loan officers make when proposing a refinance scenario involves extending the amortization of the new loan to match the original term of the loan being refinanced. A homeowner has been paying on a loan for 3 years; he or she goes to refinance and gets another 30 year mortgage. The effect of this simply wastes the 3 years of payments that homeowner already made.
In the above example you can see that the loan officer correctly compared the remaining term of the loan, not the original term of the loan, to determine the feasibility of the transaction in a more honest way. Even though the payment increased, the shorter term of the new loan means that the borrower achieves the interest savings over the life of the loan.
The Key Phrase
The point in term reduction is "Its not the rate at which you pay interest that is so important - it is the AMOUNT of interest you pay that counts."
While a term reduction does not necessarily result in monthly payment savings, it always results in a definite interest cost savings over the life of the loan. You realize these significant savings over time, accomplished through regular monthly payments of principal and interest. A competent loan officer should always prepare a term savings comparison as an alternative to the simple payment reduction. "Reducing your payment is a no-brainer", as they say. It takes a sophisticated loan officer to arrive at these calculations, and someone who really has your best interests at heart to patiently take the time and educate you about the options.
HARP Loan
Many homeowners are having trouble with their mortgage due to financial problems and a tough housing market. However, help is available from President Obamas HARP (Home Affordable Refinance Program) stimulus. This stimulus plan is designed to help struggling homeowners with new home loan modification and mortgage refinancing options that would make the monthly loan payment amount much more affordable. Here is an explanation of Obamas home refinancing stimulus program and how it can help a struggling homeowner regain control of their financial situation.
This stimulus plan consists of two main parts:
-HARP
The HARP option is strictly for homeowners looking for mortgage refinancing options. This option allows a homeowner to get a new home loan, with better interest rates or conditions, and replace their existing loan with it. This program can also be used to extend the length of a home loan for up to 40 years in length. The longer a home loan, the cheaper the monthly payment is.
-HAMP
The HAMP (Home Affordable Modification Program) stimulus plan exists for homeowners who simply want to modify their existing home loan. Loan modification will allow a homeowner to reduce their interest rates and lower the overall amount due on the mortgage. This will lead to a lower monthly payment amount. This program, like HARP, also offers homeowners 40 year mortgage repayment options.
Each program has its own benefits but each homeowner has a different financial situation or goal. Depending on credit history, current financial status, and other related information, one program may be better for a homeowner than the other. Typically, mortgage modification is the better option due to lower upfront costs, but it is harder to get approved for. Mortgage refinancing is easier to get, but costs more upfront due to the fees and costs associated with essentially getting a new home loan. There is no universal answer for a homeowner, that is why these two different plans exist.
These plans ultimately exist to help struggling homeowners regain control of their finances, help the struggling housing market, and provide an overall boost to the economy. Also, since the Obama administration knows homeowners are struggling, this plan was designed to approve homeowners in nearly any financial situation for a new low interest rate mortgage with monthly payments that are actually affordable. options have always existed, they just have not been available from the Government on such a huge level before. They have also never been easier to get approved for.
Homeowners are being encouraged to at least evaluate their situation, and the Obama home refinancing program, to see if they would benefit from taking advantage of it. Literally millions of homeowners are now able to lower their monthly mortgage payments, and save a substantial amount of money, because of the new mortgage modification and refinancing stimulus plan options. Homeowners should take action and take advantage before the plan has too many applicants and expires.
Home Affordable Refinance Program
This stimulus plan consists of two main parts:
-HARP
The HARP option is strictly for homeowners looking for mortgage refinancing options. This option allows a homeowner to get a new home loan, with better interest rates or conditions, and replace their existing loan with it. This program can also be used to extend the length of a home loan for up to 40 years in length. The longer a home loan, the cheaper the monthly payment is.
-HAMP
The HAMP (Home Affordable Modification Program) stimulus plan exists for homeowners who simply want to modify their existing home loan. Loan modification will allow a homeowner to reduce their interest rates and lower the overall amount due on the mortgage. This will lead to a lower monthly payment amount. This program, like HARP, also offers homeowners 40 year mortgage repayment options.
Each program has its own benefits but each homeowner has a different financial situation or goal. Depending on credit history, current financial status, and other related information, one program may be better for a homeowner than the other. Typically, mortgage modification is the better option due to lower upfront costs, but it is harder to get approved for. Mortgage refinancing is easier to get, but costs more upfront due to the fees and costs associated with essentially getting a new home loan. There is no universal answer for a homeowner, that is why these two different plans exist.
These plans ultimately exist to help struggling homeowners regain control of their finances, help the struggling housing market, and provide an overall boost to the economy. Also, since the Obama administration knows homeowners are struggling, this plan was designed to approve homeowners in nearly any financial situation for a new low interest rate mortgage with monthly payments that are actually affordable. options have always existed, they just have not been available from the Government on such a huge level before. They have also never been easier to get approved for.
Homeowners are being encouraged to at least evaluate their situation, and the Obama home refinancing program, to see if they would benefit from taking advantage of it. Literally millions of homeowners are now able to lower their monthly mortgage payments, and save a substantial amount of money, because of the new mortgage modification and refinancing stimulus plan options. Homeowners should take action and take advantage before the plan has too many applicants and expires.
Home Affordable Refinance Program
For much of the past year, mortgage rates have been at or near record low points. Unfortunately, many homeowners have been unable to take advantage of these rates due to declining home equity. Many homes have lost significant amounts of value since the housing market peaked in 2006. As a result, many homeowners now owe more on their mortgage than their home is worth (this condition is known as being "underwater" or "upside-down" on ones mortgage). Homeowners who lack equity in their homes are frequently unable to meet the loan-to-value (LTV) ratios required by lenders in order to refinance their mortgages. These borrowers may be missing out on thousands of dollars worth of savings.
In response to this situation, the government created the Home Affordable Refinance Program (HARP). HARP was designed to allow homeowners with little to no home equity to refinance into lower mortgage rates. HARP loans are available to borrowers with LTVs of as much as 125 percent, although the maximum LTV it varies by lender.
Some of the eligibility requirements for HARP are:
The borrowers mortgage must be owned by Fannie Mae or Freddie Mac
The home must be the borrowers primary residence
The borrower must be current on their mortgage with no late payments in the last 12 month period
The new loan must lower the borrowers monthly payments
For a complete listing of the HARP eligibility requirements, check out the Making Home Affordable Webpage here.
The HARP loan program has been extended through June 11, 2011.
Home Affordable Refinance Program
In response to this situation, the government created the Home Affordable Refinance Program (HARP). HARP was designed to allow homeowners with little to no home equity to refinance into lower mortgage rates. HARP loans are available to borrowers with LTVs of as much as 125 percent, although the maximum LTV it varies by lender.
Some of the eligibility requirements for HARP are:
The borrowers mortgage must be owned by Fannie Mae or Freddie Mac
The home must be the borrowers primary residence
The borrower must be current on their mortgage with no late payments in the last 12 month period
The new loan must lower the borrowers monthly payments
For a complete listing of the HARP eligibility requirements, check out the Making Home Affordable Webpage here.
The HARP loan program has been extended through June 11, 2011.
Home Affordable Refinance Program