The Federal Housing Finance Agency (FHFA) provides supervision, regulation and housing mission oversight to Fannie Mae and Freddie Mac. While the main objective of the HARP Deal 2.0 program is to help underwater borrowers take advantage of today’s low rates you will find another objective of HARP 2.0 is lowering the term for underwater borrowers; while it is not mandatory that you lower your term you will be enticed with lower rates if you refinance to a 10, 15, or 20 year term.
From the Federal Housing Finance Agency website (http://www.fhfa.gov/webfiles/22723/HARP%20release%20102411QandA%20Final.pdf) the following explanation and examples:
Borrowers who owe more on their mortgages than their homes are worth may be locked into their homes for years and have fewer financial options until they pay down the loan balance. A shorter term mortgage enables such borrowers to pay down the amount they owe much faster than a traditional 30-year mortgage. Furthermore, interest rates on shorter term mortgages usually are less than on thirty-year mortgages. The lower interest rate may provide borrowers the opportunity to shorten the term of their mortgages without much change in their monthly payments, and perhaps even a reduction in that payment. Such an outcome may strengthen the borrower’s financial condition and lower the credit risk for the Enterprise that owns or guarantees the loan. A few examples illustrate how this works:
• Assume a homeowner currently has a mortgage on which he or she owes $200,000 and has an interest rate of 6.5 percent – a monthly payment of $1264. If the house is worth $160,000, the homeowner has a current loan-to-value (LTV) ratio of 125 percent.
• If this borrower refinanced into a 30-year fixed-rate mortgage with an interest rate of 4.5 percent, the monthly payment would decline to $1013. But, by refinancing into a 30-year loan, the borrower’s loan balance will not reach $160,000 for ten full years.
• If the borrower chose a 20-year loan term at a rate of 4.25 percent (mortgage rates tend to be less for shorter term mortgages), the monthly payment would be $1238 ($26 less than the borrower currently pays) and the borrower’s loan balance would reach $160,000 in five-and-one-half years.
• If this same borrower refinanced into a 15 year mortgage, assuming an interest rate of 3.75 percent, the monthly payment would be $1454 ($190 more than the current payment), but the loan balance would be below $160,000 in a bit more than three-and-one-half years.
These examples are purely illustrative and are not meant to represent interest rates borrowers should expect to pay. They do show that some HARP-eligible borrowers, depending on their circumstances and priorities, may benefit from a shorter term mortgage. Since shorter term mortgages reduce credit risk to the Enterprises because of the faster repayment of principal, there will be no added fee for borrowers that choose shorter terms.
To ensure prompt attention to all your questions for California property owners interested in the HARP 2.0 Deal, work with Kevin Kueneke at The Lending Company. Contact Kevin today by calling 760-500-1919 or visit his website: kevinkloans.com