By Mike Aubrey
Traditional refi vs. HARP refi
Why do people refinance their mortgage? The answer is simple – to lower your interest rate, start building equity in your home faster and change the terms of your mortgage. A refinance is basically a restructure of your loan but the process is much like closing on a home again; an existing mortgage is paid off and a new one is created.
In a traditional refinance, there are two types of refinances – “plain vanilla,” where the existing mortgage balance is refinanced, or a “cash-out,” where a new loan that exceeds the previous mortgage is taken out. In order to qualify, your finances have to be in good shape and banks also consider your home’s loan-to-value (LTV) ratio to determine if you qualify for a refinance.
With the advent of the housing crisis in 2008, many homes lost value and are now in negative equity or “underwater.” When that happens, your LTV ratio might be higher than what lenders are comfortable with (typically 80 percent) and you may be denied for a traditional refinance – even if your finances are in good shape! Once you’re underwater, it is pretty difficult to qualify.
The HARP option
That’s where the government’s Home Affordable Refinance Program (HARP) comes in. HARP makes it easier to qualify and refinance your home when your home’s value has dropped. So how is a HARP refinance different from a traditional refinance?
For a traditional refinance, your lender will go through the same process as when you first purchased your home – there are financial checks, the property is appraised and closing and other loan fees have to be paid. With a HARP refinance, many of the hurdles of a traditional refinance are removed and less paperwork is required, making the process much more streamlined and faster. Also, no physical appraisal of your home is required. But the biggest difference between a traditional refinance and a HARP refinance is that the LTV ratio is basically unlimited – it can exceed 125 percent.
Visit HARP.gov to learn more about eligibility requirements about refinancing through HARP and then talk to your lender! You’ll have to do a little bit of lifting but your long-term savings could be put to good use!
- Can You Get a HARP Refinance If You Have a Piggyback Mortgage?
- Are You Eligible for a HARP Refinance?
- Why Now Is the Time for a HARP Refinance
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.
About the author:
He has partnered with the Federal Housing Finance Agency (FHFA) to promote the Home Affordable Refinance Program (HARP) and will be featured throughout the education campaign to help reach HARP eligible homeowners across the country.