Saving money on mortgage interest is a primary motivation for refinancing, and increasingly, home owners are using the government's HARP refinancing plan to get some extra mileage out of lower interest rates. The key is for home owners to consider refinancing into a shorter mortgage.
A report by the Federal Housing Finance Agency on the Home Affordable Refinance Program shows that the proportion of underwater home owners choosing to refinance into shorter mortgages under the program has more than doubled over the last three years. Under the right circumstances, this approach can allow home owners to save money on mortgage interest in three different ways.
The three-level appeal of shorter mortgages
According to mortgage finance company Freddie Mac, the last five years have been the five lowest on record for mortgage rates. In addition to taking advantage of the general trend of lower rates, smart home owners can layer on additional savings with a shorter mortgage.
Generally speaking, shorter mortgages have lower interest rates, so refinancing from a 30-year to a 15-year or 20-year loan will add to savings of the low-rate environment. On top of that, by paying the principal back more quickly, the home owner will knock years worth of interest expense off the loan.
A low rate environment, an additional rate discount for a shorter loan, and fewer years of interest charges represent three layers of potential savings for home owners. What's the catch? The biggest potential downside is that shorter loans usually mean higher monthly payments. Those higher payments could stress your budget, and possibly jeopardize your ability to qualify for a loan.
However, since HARP applies only to mortgages written prior to May 31, 2009, by now most participants in the program will have several years of paying off principal under their belts. This makes the monthly payments associated with refinancing to a shorter term for the the remainder of the loan less of a stretch. Indications are that a growing percentage of HARP refinancing for so-called underwater loans is being handled this way.
About the HARP program
The HARP program was designed to address a very specific aspect of the housing crisis - borrowers who were prevented from refinancing because of lower real estate values.
In response, the HARP program was introduced in early 2009, and is targeted towards loans with a high loan-to-value relationship, or LTV. It applies to mortgages owned by Fannie Mae or Freddie Mac which have a current LTV in excess of 80 percent. This includes so-called underwater loans, or mortgages whose balance is greater than the current value of the house. Since the program's inception, 30 percent of all refinancing through HARP has been on loans with LTVs of 105 percent or greater.
Home owners wishing to qualify must be current on their existing mortgage payments, must have no late payments within the past six months, and must have no more than one late payment in the past year.
HARP has been very popular. A total of 3,134,889 mortgages have been refinanced via HARP, and though refinancing generally has slowed due to last year's rise in mortgage rates, HARP refinancing still accounts for about one out of every five mortgages being refinanced these days.
As for the trend towards a greater portion of underwater HARP refinancing going into shorter mortgages, in the first couple years of the program only 9 percent of underwater HARP refinancing went into 15 or 20-year mortgages. Last year, that figure was 20 percent, and in the first quarter of 2014, it was up to 23 percent.
A limited-time opportunity
Both Fannie Mae and Freddie Mac have loan look-up pages you can use to see if your mortgage may be eligible for the HARP program. If you are interested in, you should act soon. For one thing, the program is set to expire on September 30, 2017. Perhaps even more pressing is that all refinancing depends to some degree on the level of mortgage rates. After rising last year, mortgage rates have declined in the early part of 2014, but it may not be safe to count on that trend continuing.
If you are eligible for HARP refinancing, consider all your options, including switching to a shorter mortgage. You should budget carefully to make sure you can handle the payments, but the triple opportunity to save on interest expense may make a slightly higher monthly burden a little easier to bear.