HARP 2.0

Pin It

*If you are underwater homeowners and would like to refinance, read this now*

For underwater homeowners who want to refinance their mortgages, the details of HARP 2 are coming into focus.

HARP 2 is a liberalized revision of the Home Affordable Refinance Program. (See Bankrate's HARP page.) HARP's goal was to allow homeowners to refinance their loans, even if they owed more than their homes were currently worth. Millions of homeowners are in this predicament because their homes lost value in the bursting of the housing bubble.

HARP was introduced in 2009, and it was designed to help homeowners with mortgages owned by Fannie Mae or Freddie Mac. The program let borrowers refinance at up to 125 percent of their homes' current values. For example, under HARP, if you owed $125,000 on a house that was now worth $100,000, you could qualify for a HARP refi, because your loan was 125 percent of the home's value. But if you owed more than 125 percent of the home's value, you were out of luck.

That 125 percent loan-to-value limit has been eliminated under HARP 2. Under new rules issued on Tuesday, there is no loan-to-value limit on HARP refis -- at least, for borrowers who have fixed-rate mortgages.

The elimination of the loan-to-value limit is the biggest change under HARP 2. Here is a rundown of HARP 2's guidelines:

• The program is for borrowers whose mortgages are owned by Fannie Mae or Freddie Mac, and who got their loans before May 2009.
• HARP had been scheduled to expire at the end June 2012; HARP 2 extends the expiration to the end of 2013.
• There is no loan-to-value cap anymore for borrowers who now have fixed-rate mortgages.
• For borrowers with ARMs, the loan-to-value cap remains 105 percent.
• Borrowers can qualify for HARP 2 refis if they have paid on time for the last six months and have no more than one 30-day late payment in the last 12 months. Originally, HARP didn't allow any delinquencies in the last 12 months.
• Fees have been reduced. Lenders are fond of adding fees to loans that have an added smidgen of risk. Fannie and Freddie call these fees "loan level price adjustments," and the charges easily can climb to 2 percent of the loan amount on HARP refis. Under HARP 2, the fees are reduced to zero percent on loans for 20 years or fewer, and 0.75 percent for mortgages for more than 20 years and for ARMs.

Generally speaking, the changes go into effect  Dec. 1.

Regulators and analysts expect HARP 2 to result in 1 million more refis than would have closed under HARP, with an average loan balance of $150,000 to $175,000.

By Holden Lewis · Bankrate.com

Read more »

Borrowers Wade Back Into Adjustable-Rate Mortgages

Pin It

Wouldn't it be nice to have a mortgage where the interest rate begins with the number “3?”

More borrowers seem to think so, as more of them are opting for adjustable-rate mortgages, whose rates have become even more alluring compared with fixed-rate mortgages.

The rate on a 5/1 adjustable-rate mortgage — that is, a loan where the interest rate is fixed for the first five years and adjusts annually thereafter — is 3.23 percent on average, or about 1.35 percentage points less than a traditional 30-year fixed-rate mortgage, according to HSH.com, which publishes mortgage and consumer loan information.

Lured in by the attractive rates, about 12 percent of the $325 billion in new mortgages made were adjustable-rate loans, known as ARMs, in the first quarter. That compares with 9 percent of new mortgages issued in the fourth quarter of last year, according to Inside Mortgage Finance, a newsletter that tracks the mortgage industry.

During the housing boom, borrowers — especially those with spotty credit histories — took out ARMs in droves. In 2006, 45 percent of mortgages issued were ARMs. But we all remember how that movie ended: Just as many of these borrowers’ loans were about to reset to a much higher rate, the housing market crashed and many people couldn’t refinance into another loan with a more manageable monthly payment. In many cases, borrowers didn’t fully understand what they were signing up for, since the loans carried complex features that either weren’t disclosed or were hard to comprehend. Others simply got in over their heads.

“By and large, the ARM market was polluted by the abuses that went on with subprime mortgages,” said Guy Cecala, publisher of Inside Mortgage Finance, adding that “prime” mortgages sold to borrowers with solid credit histories tend to have much clearer terms. Now, “both borrowers and lenders are getting more comfortable with ARMs again.”

The ARMs being used most frequently are known as hybrid ARMs, which means there’s a period, say three or five years, where the interest rate is fixed. That offers some protection against a spike in interest rates, but there’s still the possibility your payments may rise to a less manageable level later (and that you won’t be able to unload your home if you need or want to sell).

Consider a borrower with good credit who needs a $200,000 mortgage. A 30-year fixed mortgage will carry a rate of about 4.49 percent, which translates into a $1,102 monthly payment. But the borrower could save about $128 each month by taking out a 5/1 ARM with a 3.375 percent rate, which translates into a payment of $884 per month. Over five years, that’s a savings of about $7,680.

“If you know you will sell the home within five years, then it’s a no-brainer,” said Rick Cason, owner of Integrity Mortgage, a mortgage firm in Orlando, Fla., who provided the numbers. “But most people are unsure about what the future holds for themselves or the housing market.”

That’s why it’s important to understand the inner-workings of the ARM, if you decide to go that route. All traditional ARMs have caps and floors, which state how much the rate can change over the life of the loan.

For instance, the typical 5/1 ARM has what’s known as a 5/2/5 cap, explained Mr. Cason. Here’s how that translates into English, using the loan with an initial 3.375 percent rate: The first “5” determines how much the rate can increase (in this case, five percentage points) above the initial rate during the first year after the fixed period is over (So it can climb as high as 8.375 in year 6).

The “2” is the maximum amount the rate can change in any year after that. And the last “5” is the maximum amount the interest rate can adjust from the original rate over the life of the loan. So, at least in this case, the loan wouldn’t rise above 8.375 percent. But all borrowers should make sure they can afford to make payments based on that higher rate, should the worst case actually happen.

Now you can see why Elizabeth Warren wants to make sure all of this is explained in plain English.

When Mr. Cason walks his clients through the details, he said most of them decided to stick with the stodgy but reliable 30-year fixed loan. “Fixed rates are too low without the risk of adjustment in the future,” he added. “I am not seeing many people in Orlando choose an ARM product.”

via NY Times

Read more »